Few lines of business were as badly battered by the COVID-19 as hoteling. One of the people sitting in the center of pandemic maelstrom was Greg Friedman, managing principal and CEO at Peachtree Hotel Group in Atlanta.
How rough did things get for the hotel business during the throes of the COVID-19 pandemic, and where do things stand today?
The depth of the crisis was unprecedented. Although many hotel operators, including us, have a playbook to manage through recessionary declines in occupancy, I don’t believe anyone had a plan to operate through a pandemic where demand goes to effectively zero. It never happened in our industry before, so how do you prepare for that? Fortunately, the industry is in a sustained recovery cycle, boosting hotel fundamentals. The resilience of the hospitality industry is due to its core fundamentals. The pandemic interrupted its growth trajectory; it hasn’t altered it. As an effective inflation-hedging investment, we continue to believe hotels will remain among the strongest real estate sectors for investing.
What were the keys to surviving, and maybe prospering, during the pandemic?
The pandemic created numerous investment opportunities to exploit. Companies that could pivot quickly and capitalize on cycle-specific opportunities were successful. They could acquire investments at a lower cost basis than pre-pandemic pricing. From a debt perspective, hotel owners are looking for financing options to ensure their properties and portfolios have an optimal capital stack to see them through to a stronger operating environment. Traditional lenders have become less flexible, creating opportunities for those who can provide creative and cost-efficient capital solutions for sponsors’ unique needs.
What kind of changes have come to hoteling as a result of the pandemic?
The current travelers (millennials, baby boomers, business) frequent limited- and select-service hotels more often. With many travelers opting for more extended stays, their trip might not be limited to leisure; thus, they’ll be looking for a room they can work in comfortably and spend time in the lobby where they can socialize. These hotels address today’s traveler’s value and convenience preferences. Relative to traditional and alternative real estate property sectors, the limited- and select-service hotel sectors may outperform from an occupancy growth, room-rate growth, yield and returns perspective. We’ve seen this performance endure multiple economic cycles, highlighting the downside risk protection and durable income stream these sectors offer.
There are several different categories of hotels. Where are the investment opportunities in a lodging market that has become dislocated?
Due to the pandemic, there’s also been a lot of disruption and inefficiency within the lodging market, creating sound investment opportunities. There is a solid market to raise capital in the lodging industry. Most investors looking to invest in real estate are very comfortable in the lodging sector. Moreover, it offers one of the best hedges against inflation compared to most other commercial asset classes, given that hotels reprice daily. So that’s a compelling story for investors.
What are the prime challenges hotels will face going forward?
Major hotel brands like Marriott and Hilton are now starting to require hotel owners to make renovations that have been delayed due to COVID. Many hotel ownership groups need to find capital to do these renovations, and I think that will motivate many hotel owners to look at selling hotels, given the brand pressure. Also, lender pressure is going to continue to exist as loans mature. I think that will help further facilitate asset sales, coupled with ownership groups being fatigued from the past two-plus years. We are optimistic that more hotels will come to market, bringing pricing down. We believe the current environment is set up for a strong number of years from a performance perspective and a cash flow perspective in an inflationary environment.