Our team has been researching the hospitality investment arena for several years now. We have made the decision that as we close out 2021 and move into the new year, one of the asset classes that we will be adding to the PassiveInvesting.com real estate portfolio are hotel assets.
So, let’s take some time to review the industry and share some insights on what is on the horizon in the space.
Covid-19 Impact on Hotels
As you already know from all the headlines from last year, the hospitality industry took a beating with travel coming to a halt for the better part of the year.
In 2020, RevPAR (revenue per available room) for the US market was down nearly 50% versus 2019, making it the worst year in the entire history of the hospitality industry.
I remember in the beginning of the pandemic, when all the shutdowns were happening, calling up CEO, Jason Boehm, of our hotel management partner, Aileron Management, located in Greenville, SC. I asked him, “How are things going with your existing portfolio?” He replied, “Dan, it’s awful. It’s not looking good for the industry right now.”
We have continued to follow the recovery trajectory and their portfolio has continued to perform well as they come out of the slow 2020 pandemic year. Revenue is still not at 2019 levels but they are certainly seeing the light at the end of the tunnel.
Post-Pandemic Hotel Recovery
The hotel industry has made up for about half of the losses from 2020 in 2021 and are projected to finish the year down about 25% from the 2019 levels.
The type of hotels that are suffering the most right now, which is keeping the overall recovery slow, is the corporate-travel hotels and conference hotels. In addition, hotels in states with strict COVID-19 restrictions are also making the overall rebound look worse than it really is.
Trading volume was almost non-existent in 2020 as the pandemic froze the market. However, deal volume has picked up in 2021 as capital seeks higher yields (more about returns later in this article), and the hotel recovery is underway.
RevPAR across the board is expected to reach 2019 levels by the end of 2023. It is also expected that there will be a large rebound uptick in subsequent years to make up for the prior years. This is where it gets exciting for passive investors. We can acquire assets right now with a solid basis and hold them until the rebound occurs. This allows us to exit at the right time.
This may seem like a slow recovery. It is mostly because of hotels that need corporate travel and conference travel to return to show a more positive outlook.
ADR – All Time High in 2021
The ADR (average daily rate) reached an all-time high in the summer months of 2021. This was primarily due to leisure travel as the corporate travel has not had as large of a return.
When corporate negotiated travel returns, occupancy will increase, and the ADR will adjust slightly.
Corporate travel is not expected to return until 2022. Group and convention business will likely remain muted until 2023.
Types of Hotels for Investing Right Now
The Select Service hotels (see figure 1 for example hotel brands), especially those in leisure and diverse markets, have weathered the downturn better than full-service and convention hotels.
Select Service is where we plan to acquire assets over the next several years. Many of these hotels have seen a full recovery and high rebound effect causing them to have higher revenues than other types of hotels.
Our goal is to acquire hotel assets in the $20mil to $80mil price range in strong markets with solid demand drivers that will allows us to capitalize on the uptick in travel over the next several years.
Passive Returns for Hotel Investing
One of the nice things about hotel investing is that the returns are higher than multifamily passive investing. This is primarily due to the fact that there is a higher risk when investing in hotels vs multifamily assets.
The risk is in the short-term, one-day lease with a hotel versus the longer 12-month term leases with multifamily assets.
The one-day leases are great in one respect because it allows for price fluctuations at greater adaptability. With a long-term, 12-month lease it takes a longer time to increase the rental rate.
However, the downside for hotels is that a short-term, 1-day lease can be risky when it comes to changing market conditions like we saw with the COVID-19 pandemic.
The nice thing is that the passive hotel investing allows for higher overall returns because there is a higher risk profile. Higher risk = Higher potential return.
Typically, what you will find is that the cash flows are higher and come with a higher preferred return. The overall return is also higher with potentials for mid-to-high teen IRRs with potential for 20%+ IRRs depending on exit scenarios and market conditions.
Timing on First Hotel Deal
We are working closely with our hotel management company in underwriting and touring multiple hotel assets in the select service hotel space. We expect to have at least 1 asset available for investment by years end and additional deals available for review in Q1 2022.
If you have any questions or want to be put on our special “first-look” list for our upcoming passive hotel investment opportunities, then be sure to email Andrew Davis, andrew@passiveinvesting.com, our Director of Investor Relations.
As we move into 2022, we will continue to build out our hotel acquisitions and asset management team to continue to support these efforts to find and maintain high quality select service hotels.