It’s hard to overstate just how devastating the pandemic has been for the hotel and hospitality industry. There has never been a crisis of this size and scale. But as vaccine rollouts continue, restrictions begin to ease and travel returns, the hospitality industry is coming back to life.
We caught up with Matt Dower, Director of Operations for Berkadia Hotels & Hospitality, to talk about what a return to normalcy looks like for the hotels market, how investors are responding and what Berkadia anticipates in the months ahead.
In late last year, we started to see the early signs of thawing in the hotel market with drive-to leisure travel picking up. Where is the market now? Are we starting to see more interest from investors?
For most of 2020, consumer travel remained at all-time lows, which left hotels in major cities across the country struggling to stay in business. Almost two-thirds of hotels operated at or below a breakeven point with an ability to pay debt. Urban hotels and large group convention hotels suffered the most, while drive-to leisure did better than most, with economy level extended-stay performing very well.
According to the AHLA, travel is not expected to return to 2019 levels until 2024. However, we’re starting to see more positive signs, particularly related to leisure travel, with 56 percent of consumers saying they expect to travel for leisure or vacation in 2021, roughly the same amount as in an average year.
The beginning of the industry rebound is coupled with incredible pent-up demand, as 2020 saw billions of dollars in capital raised in close-end funds targeting hotel and hospitality assets. Private equity groups and high-net-worth individuals will continue to be active investors of hotel assets in 2021.
How will the long road to recovery impact investors? Are there any silver linings?
It will definitely be a “bottom-up” recovery. In the past, some have thought the economy extended-stay segment to be riskier than, for example, limited-service hotels, but the truth of the matter is, it is not. The segment has shown its resilience in downturns, and the product lends itself to that.
Overall, the sector is doing better than initially expected. Last year, some experts forecasted discounts of 25 or 30 percent, but we have not seen that. Current discounts are between 5 and 15 percent of 2019 values.
On a positive note, the operating efficiency forced upon management companies at the depth of the pandemic could translate into an ability to drive greater NOI as revenues continue to recover.
Where can, or should, investors be looking for opportunities?
Obviously, distressed assets are a big area of interest in the hospitality sector, but there are different levels of distress. Some assets were obsolete or distressed before the pandemic and a number of big box, urban destinations were already suffering from low occupancies and declining RevPAR numbers before COVID-19.
These types of assets are a great option for potential conversion. We have seen a number of hotels attract a higher purchase price from market-rate or even affordable housing developers interested in conversion, rather than continuing to operate as an existing hotel.
We recently facilitated the sale of the Georgetown Suites, a hotel portfolio totaling 223 rooms in Washington, D.C. The buyer plans to convert the hotels to a multifamily apartment community, which is an especially attractive opportunity because the hotels were originally built as furnished apartments. The conversion from lodging to multifamily should be rather seamless for the new owners. And of course, the location speaks for itself as the Georgetown neighborhood of D.C. is one of the highest barrier to entry submarkets in the region.
What is Berkadia’s outlook on the recovery?
The pandemic had the effect of eliminating all of the over-supply in the hotels market. With a great number of hotels never reopening and others converting to multifamily, room supply will be down. Now pair that with pent up demand and increased operating efficiencies, and you have a recipe for a steep recovery.
We’re excited to see our work with clients continue to pick up, as we help them to source and finance the right deals for their portfolios. We’re optimistic that pent-up demand to re-experience the world and get back to business will boost hotel performance across most markets and we’re excited to be a part of the hospitality industry’s recovery.
Everyone loves a comeback story!