Publications

- March 1, 2021: Vol. 8, Number 3

The good, the bad and the promising in the hotel sector

by Mike Consol

The hotel business, firmly in the grip of the COVID-19 crisis and trying to stare down the loss of nearly 4 million jobs, will begin seeing modest signs of recovery this year, according to JLL Hotels & Hospitality’s annual Hotel Investment Outlook. Helping fuel the recovery will be private equity groups and high-net-worth individuals, who are expected to become active investors in the space during 2021.

That report has come on the heels of the State of the Hotel Industry 2021 report produced by the American Hotel & Lodging Association, which was graphic in its acknowledgement of the scope and depth of the hotel industry’s travails, calling the effects of the pandemic “devastating.” While millions of jobs have been lost, only around 200,000 are expected to be recouped this year, and half of U.S. hotel rooms are projected to remain empty. Overall, the accommodations sector faces an 18.9 percent unemployment rate, according to the Bureau of Labor Statistics.

Precisely, one might expect investors who specialize in distressed business situations to say. Just prior to the arrival of COVID-19, the U.S. hotel industry was enjoying the best fundamentals in its history, despite unprecedented competition from “sharing economy” competitors such as Airbnb and VRBO. The hospitality business is expected to mount a comeback, albeit gradually.

While the pandemic will have long-term implications for the industry, the JLL report says during the short term several trends should be taken into account, including the $24.5 billion raised during 2020 by closed-end funds targeting hotel and hospitality assets globally, matching 2016 levels. All global regions are seeing a flurry of fundraising activity, with opportunistic capital ready to mobilize on distressed assets, allowing nontraditional investors to get a piece of the lodging pie at a competitive price.

Poised to benefit some investors is the “manchise” structure, which is a brand management contract with the flexibility to be converted to a franchise agreement. The manchise structure is on the rise as hotel parent brand companies evolve from traditional management agreements. JLL expects manchise agreements to grow in prominence as hotel parent companies expand their geographic footprint and owners demand more flexibility and accountability. Manchises can also potentially result in lower overall fees for a hotel owner, while also making hotel parent companies more competitive in the hotel management space, the report says.

What’s more, consumers slowly began to travel again during the pandemic, with noticeable preferences for larger, individual and private accommodations to comfortably stay for longer periods of time and work productively, remotely. Because of this, extended-stay hotels and vacation/residential rental options outperformed the greater accommodations industry. Additionally, operators accelerated their technology advancements, as touchless/contactless service became a priority for consumers.

For investors’ financial commitments to succeed, JLL says hotel assets must remain agile and adopt operational changes that ease travelers’ concerns and to re-examine their product offerings to remain competitive as consumer preferences change.

The climb will be slow and difficult. The State of the Hotel Industry 2021 from the American Hotel & Lodging Association points out that business travel, which comprises the largest source of hotel revenue, remains nearly nonexistent, but it is expected to begin a gradual return in the second half of 2021. Among frequent business travelers who are currently employed, 29 percent expect to attend their first business conference in the first half of 2021, 36 percent in the second half of the year and 20 percent more than a year from now. Business travel is not expected to return to 2019 levels until 2023 or 2024.

The report forecasts that business will be down 85 percent, compared with 2019, and will stay that way through April 2021, before ticking up slightly. Some 56 percent of consumers say they expect to travel for leisure, roughly the same amount as in an average year. Nearly half of consumers see vaccine distribution as the key to their full-fledged return to travel. Consumers are said to be optimistic about national vaccine distribution during 2021, which is why leisure travel is expected to return first.

Their selection of hotels will favor properties practicing enhanced cleaning and hygiene routines, though price will remain the number one factor in hotel selection, the report says.

Fifty-six percent of U.S. residents indicated they are likely to travel for leisure or vacation in 2021, while 34 percent of adults are already comfortable staying in a hotel.

“COVID-19 has wiped out 10 years of hotel job growth, yet the hallmark of hospitality is endless optimism, and I am confident in the future of our industry,” said Chip Rogers, the hotel association’s president and CEO. “Despite the challenges facing the hotel industry, we are resilient. Hotels across the country are focused on creating an environment ready for guests when travel begins to return.”

The resurgence of COVID-19, the emergence of new strains, and a slow vaccine rollout have added to the challenges the hotel industry faces this year. With travel demand continuing to lag normal levels, national and state projections for 2021 show a slow rebound for the industry, before accelerating in 2022.

The JLL report also acknowledges the road to recovery will be long, but it expresses optimism that pent-up demand to re-experience the world will gradually boost hotel performance across most markets.

“Once recovered,” the report says, “hotels should look and feel much different than they did at the beginning of 2020.”

Download the full JLL Hotel Investment Outlook at this link: https://adobe.ly/3rjSWPV. The full State of the Hotel Industry 2021 report from the American Hotel & Lodging Association can be downloaded here: https://bit.ly/2YFxUPd

 

Mike Consol (m.consol@irei.com) is editor of Real Assets Adviser. Follow him on Twitter @mikeconsol to read his latest postings.

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