For the past 10 years, Spain has been a poster child for hotel development and branding opportunities amid high demand from travelers seeking sunshine, resorts, beaches and culture.

As more international brands have discovered the strength and inherent opportunities across Spain's principal and secondary hotel markets, family hotel companies and independent hotels have had to streamline operations and becoming more globally aware of distribution strategies to compete.

Challenges recently have arisen from higher costs — in part due to the Russian invasion of Ukraine, high inflation and rising interest rates. Also complicating matters are labor shortages, changing guest habits and requirements, and airline and airport glitches in key feeder markets such as the United Kingdom.

The evolution of the Spanish hotel industry has followed that of the Iberian Peninsula, which includes Spain and Portugal. Business there is increasingly driven by more diverse and international capital, the introduction of artificial intelligence and the adoption of franchising, which wasn't as popular as in other world regions.

Ana Ivanovic, executive vice president and head of Spain hotels transactions at business advisory JLL, said Spanish hotel ownership continues to trend away from family offices and owner-operators to institutional capital.

She added that sovereign wealth funds, especially those from the Middle East, have also risen in prominence. One recent example is the Abu Dhabi Investment Authority acquired a 17-hotel portfolio in Spain at a reported cost of €600 million ($642 million) in early September.

Ivanovic said sovereign wealth funds have “contributed 35% of the transactions volume in Spain this year, although dominated by one sale, but it is a huge development.”

“In more traditional years, always it was private equity that was responsible for between 35% to 40%, and then [high-net-worth] individuals and owner-operators. [sovereign wealth funds] usually made up 15%. We’ve not seen much Middle East investment for some time,” she said.

Fernando Gallardo is president of technology center Eurofintech, secretary of Spanish hotel group Alianza Hotelera and the hotel critic at national Spanish newspaper El País. Alianza Hotelera is an alliance of 22 small- and medium-sized Spanish chains, which by room count is the fifth-largest hotel group in Spain.

Gallardo said the main challenge for investors is finding real estate assets at a reasonable price in the destinations most conducive to the predicted tourism growth.

“The next big challenges will be to guess what other destinations can be valued and to establish a reliable predictive model for regions and cities. … We believe that Madrid and Barcelona will continue to be great cities, although the potential that Madrid offers is greater than that of Barcelona at present,” he said.

“And other very expansive cities, such as Valencia and Málaga, are now at an unaffordable level for investors who need to make a profit in the short and medium term. But other cities such as Zaragoza, Granada, Alicante, Marbella and Cádiz can offer magnificent opportunities in the coming years,” he added.

Gallardo said the Spanish hotel industry is becoming more complicated with the entrance of new operators, both domestic and international.

“Spain's high specialization in hotel-cost optimization, the world leader in this area, cannot last for long, and the high [average daily rates] reached after the pandemic will remain a solid factor for companies. Hotel companies need to position themselves in a segment of higher quality and better valuations,” he said.

He added that Alianza Hotelera’s consolidation of strategies and resources is a testament to a new Iberian investment vision, which is truly global and no longer limited to smaller companies.

Ivanovic said huge hotel investment opportunities remain in Spain.

“Of all the rooms owned in Spain, I would say only 10% could be termed professional. The majority are still held by families. One thing to have in mind is the story of family ownership selling because their assets are unbranded and unrenovated, or they feel they cannot compete in a market that is still very fragmented,” she said.

She added it is still a rare occasion when a family office sells an entire hotel portfolio, rather than a single property.

That modus operandi does not suit private equity's need to recycle capital, Ivanovic said. The bid-ask spread — or the divide between buyer and seller pricing — also discourages private equity investors.

“The perception of sellers is that they have had record years, and so the sale prices will be based on that output, while buyers say they are not sure cash flows are sustainable, so there is a disconnect,” Ivanovic said.

“Many owners are holding on to assets, as, they think, as long as there are returns and increased cash flows cover debt, why would we sell?” she said, adding for many such owners their hotels retain an emotional connection.

Gallardo acknowledged the rise in Western European franchising.

“Market demands require recognized brands and, above all, operational know-how that is not always found in independent hoteliers. As a result, small chains and independent hotels that need a high investment in their digital transformation and their commitment to sustainability will be forced to seek large international partners or, as we have done at Alianza Hotelera, combine their assets and management systems to face such challenges.”

Gallardo said Spain remains attractive to investors, but hotel firms and brands need to define and tweak their front-of-house and back-of-house operations.

As an example, he cited a product his company launched in September, testing and implementing artificial intelligence use through workshops for specific departments of hotel brands.

Also, “from the perspective of sustainability, we have managed to reduce the environmental impact of one-fifth of our hotels through an energy-savings project with a carbon footprint reduction of up to 40% in some cases,” he said.

As for the arrival of more international brands putting pressure on small, family companies to cede management or ownership, “it is a trend that is being seen all over the world,” Gallardo said. “Family offices are looking for partners to help them manage their hotel assets in a professional and profitable way.”

Amid all this excitement, hotel markets outside of Madrid, Barcelona and the Costa del Sol are performing much better. Ivanovic pointed to secondary markets such as Valencia, Sevilla, Cádiz and the isle of Menorca.

“There has been a rise in international operators interested in these markets, as long as these investors can see a growth story and an infrastructure story,” she said.

Even in the established markets where leisure tourism has been a major economic factor since the late 1960s, Ivanovic said there remain opportunities.

“The Costa del Sol is the prime resort market in Spain. It has 35,000 rooms across all categories, but only 1,500 rooms, or less than 5%, transacted there from 2020 to today. Much more can be done, particularly in reform sorts,” she said.

Domestic demand from travelers has shifted, she said, from Spanish destinations perceived as too expansive, such as Ibiza and Mallorca.

She said interest from private equity investors has also shifted to urban hotels, rather than beach resorts.

According to data from CoStar, performance metrics in Spain lag those of the other Mediterranean powerhouse, Italy.

Spain hotel average daily rate in June and July came in at €156.24 and €168.64, respectively, while in Italy for the same months, ADR was €271.84 and €263.89 over the same two months.

Ivanovic said Italy has made a momentous success of its marketing and has a well-established and strong reputation among U.S. travelers.

“Italy can charge high for outdated rooms, which you cannot do in Spain, [which is] traditionally a mass market for Brits and Germans. Spain is in its very early days of that shift. Up until last year, there were almost no hotels in Spain that were [charging] more than €1,000 [a night],” she said. “That situation has changed with the opening of several ultra-luxury hotels, although that trend us still at the inception of its growth.”

ADR in Spain is “significantly above 2019 levels, though,” Ivanovic said.

“Hotels continue to show resilience, as does leisure demand, and there has been a successful effort to make sure the country’s business fundamentals are strong or stronger. Hotel owners are not as leveraged as they once were,” Ivanovic said. “The continuation of excellent trading performance has been wonderfully surprising. This summer [so far] was a record summer, and where many thought, well, we’ll see a dip, the reality is that this has not happened, as it has happened in most of Europe.”

Gallardo said business and group travel demand is also showing signs of life in Spain.

“It will recover soon, [and we can] point to a considerable increase in medium and extended stays and in the flow of remote workers that we did not see before. In fact, Spain is becoming a high-end destination for remote workers,” he said.

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