In 2020, US hotels suffered the largest drop in occupancy since the Great Depression in 2020, according to a report by Real Estate Services CBRE from the fourth quarter. The annual occupancy rate fell by an average of 41.6 percent. Revenue per room (RevPAR) decreased by 55.5 percent compared to 2019.
Luxury and upscale hotel chains saw the biggest deterioration in property fundamentals over the year. The occupancy rate fell by 65 percent annually and by almost 72 percent in the last quarter of 2020. Hotels in the lower price range saw less significant decreases in occupancy, but remained below 50 percent.
Inexpensive hotels, especially in the extended-stay category with kitchenettes, continued to operate during the pandemic and served as secondary homes for many medical and rescue workers who lived there to prevent family members from contracting COVID-19, notes Scott Berman , Principal at consulting firm PwC and an industry leader in hospitality and leisure with the group.
“Due to the short lease structure of the hotel industry and the dependence on recurring business and leisure trips, it was particularly exposed to the protection mandates and the resulting economic shock,” says Rachael Rothman, CBRE head of hotel research and data analysis.
However, she suggests that like the sector’s sudden and steep decline, the upside rebound may come as a surprise. “We’re seeing steady improvement in occupancy, travelers passing TSA, and the highest number of net airline tickets purchased in months,” said Rothman. “The pace of recovery will largely depend on the pace of vaccine adoption and the flexibility of large corporations’ travel budgets.”
Kevin Mallory, global head of CBRE Hotels, a global service platform focused on the hotel and leisure space, is also optimistic about the sector’s recovery. CBRE Hotels’ expectation is that investors will become more aggressive as certainty about the US economy’s recovery and exit from the pandemic improves, especially in the hardest-hit segments of the hospitality industry, where the best deals can be found .
However, Mallory admits that the U.S. hospitality industry is unlikely to fully recover to 2019 occupancy and RevPAR levels by 2025. However, the recovery will also be faster in certain market segments. For example, he notes that resort and select-service hotels in drive-to destinations in the Sunbelt, coastal markets, and leisure destinations easily accessible to major urban centers are likely to recover first. These destinations would include locations like Virginia Beach, Virginia, Charleston, SC, Savannah, Georgia, and Santa Barbara, California.
The general recovery in the sector will be gradual, agrees Berman. But “Hotels in resorts near mountains, beaches and lakes have done well during this (pandemic) and will continue to do well.”
Travel on vacation has already begun and is now a leader in the US lodging segment, says Adam McGaughy, senior managing director in the hotel and hotel group of real estate services company JLL. Even at the height of the pandemic, drive-to-resort destinations were in relatively high demand. The work-from-home guidelines allow workers to visit destinations with warmer weather, he notes. Now “weekend demand is beginning to return to most major US cities as restrictions are relaxed and hotels seduce travelers with attractive low prices.”
Berman emphasizes that location will continue to be key. “A roadside hotel is better positioned than a hotel on a downtown subway,” he says.
Mallory agrees that the recovery from full-service luxury hotels is likely to lag behind in urban centers like New York and San Francisco. This is because these hotels derive much of their revenue from business travel, business meetings and other events, as well as international travel, and all of these types of stays are expected to lag behind the overall recovery. U.S. companies have removed most travel from their 2020 budgets and likely won’t add them again until 2022 or 2023, Mallory says.
Companies that sponsor industry conferences and other events are in no rush to bring hundreds of people together in enclosed spaces. He adds that these events are not expected to resume for two to three years and that event planning needs to be incorporated into the schedule.
“Many office buildings and businesses still have strict travel and visitor policies that could limit the growth of corporate transients in the near future,” said McGaughy of JLL. However, he believes that as vaccination increases, more people will feel safe traveling and the resumption of trade shows and industry events will encourage companies to fund these types of trips.
“Corporate spending on large meetings simply provides a better ROI than individual business travel because many companies and associations fund a large part of their budget based on the significant income from attending large trade shows and events,” he says.
Meanwhile, hotel owners with assets in core markets will bear the brunt of the impact of the pandemic as the burden of keeping the lights on rests with them rather than the brands that manage the properties, Berman says. So far, however, investors have not taken advantage of the sector’s plight to any great extent.
While some hotels traded hands-on in 2020, investment in this sector fell 68 percent from 2019 to $ 12.2 billion from nearly $ 39.0 billion, reports CBRE.
“The industry is still trying to calibrate where the values are going, so this is a developing story,” says Berman, noting that there is currently a discrepancy between what sellers are asking for and what buyers are willing to pay, consists.
Mall transaction activity spiked in the final quarter of 2020 as the vaccine rollout began and investor confidence improved, according to Mallory.
McGaughy points to the surge in air travel and suggests that investors may react to a recovery that is already underway. “It seems to me that some of this is priced into public hospitality REITs and C-companies, but the market is also reacting to declining losses that these companies are reporting and that generally exceed analysts’ expectations,” he says.
The data points collected over the last nine months of 2020 suggest a mixed decline in hotel values based on differences in service level, chain scale, location type, price tier and sources of demand, reported Tommy Crozier, CBRE National Practice Director, CBRE Hotels Advisory, in a current CBRE white paper.
For example, subordinate, economic, and mid-range hotels on highways have seen the least disruption to operations and values as they continue to host critical workers, transportation professionals, healthcare workers, construction workers and recreational guests, according to Crozier.
The latest investment sales point to a bottom-up rebound, according to data firm CoStar Group. For example, earlier this week a partnership between Blackstone Real Estate Partners and Starwood Capital Group announced the acquisition of Charlotte-based Extended Stay America and its paired real estate investment trust ESH Hospitality for $ 6 billion in cash, or approximately $ 19.50 apiece Share.
Six more hotels were recently traded, according to CoStar, including:
- The 102-room Killington Mountain Lodge in Vermont was sold to MRC, a subsidiary of Hilton, for an undisclosed price.
- The Las Vegas Venetian Resort and 7,092-room Sands Expo and Convention Center were acquired for $ 6.25 billion through a partnership between Vici Properties and Apollo Global Management.
- The 325-room Dallas Magnolia Hotel was sold for an undisclosed amount to NewcrestImage, a hotel management and investment firm based in Grapevine, Texas.
- The 245-key Courtyard San Diego Downtown was sold for $ 64.5 million to Pimco, a Newport Beach, California-based investment management firm.
- Courtyard by Marriott Denver-Aurora was picked up by Legendary Capital, a REIT hotel in North Dakota for $ 27.9 million. and
- The 132 room extended stay Hyatt House Frisco in the Dallas market was sold for an undisclosed sum to an undisclosed investment firm in the northeast.
Mallory says lender interest and a tremendous amount of stocks hauling hotel business are fueling the current surge in investor and seller action. He notes that a number of large investment firms, including Blackstone, Starwood, Brookfield and Softbank’s Fortress, have set up funds for distressed hotel businesses.
“A record amount of equity has been raised to invest in the hospitality sector, assuming there would be widespread distress and the opportunity to acquire high quality assets at a significant discount to their pre-COVID valuations,” added McGaughy.
So far, “durable and attractive assets are trading within 10 to 15 percent of 2019 values,” Mallory said. However, he notes that non-permanent and less desirable assets trade and continue to trade at steeper discounts between 25 and 40 percent.
For example, the 310-key Royalton Hotel, Embassy Suites in New York’s Garment District, sold for $ 115 million in September 2020, or 41 percent off the $ 195 million seller Ashford Hospitality Trust Inc. sold 18 months earlier paid for it
McGaughy notes that significant emergencies were certainly to be expected in the early stages of the pandemic as loan defaults in the sector rose by double digits in June 2020. However, the massive wave of hardship that everyone had expected never materialized.
“There will likely be some discounts, but there has not been a rapid slowdown in values,” says Berman, who adds that there is strong sponsorship behind many hotel portfolios.
Instead, according to McGaughy, a lack of available products in the market has resulted in increased competition and sharp increases in value approaching pre-pandemic levels.
Mallory believes the shortage of available real estate for sale will be reversed as hotel owners finalize debt surveys with lenders and bring real estate to market later this year.
Meanwhile, according to McGaughy, many of the investors looking for distressed opportunities are focused on acquiring quality hotels, with a keen eye for assets in drive-to-resort destinations that have proven resilient during the pandemic.