BERLIN — There are a lot of questions about the future of international outbound travel from the U.S., and hotel brand executives and investors aren't waiting around to find out what's going to happen.
During the "Colliers Capital talks: Poised for the rebound" panel at the International Hospitality Investment Forum EMEA, hotel industry leaders spoke about how they're watching for any potential drop in demand or economic problems and adjusting their strategies ahead of time.
Tourism needs stability, and whenever politics starts rocking the boat, it’s not good for anyone, said David Fattal, founder and CEO of Fattal Hotel Group. The banks take more cautious approaches, as well. One of his colleagues in The Netherlands said convention organizers want hotels to be more flexible with their cancellation policies.
“You see there is nervous [energy] in the air, and it comes from the States, but it’s going all over,” he said.
However, Fattal said he’s not overly worried about what this may mean for international outbound travel from the U.S.
“I think people will consume tourism, consume hotels,” he said. “Even If somehow the economic situation got worse, they still spend the money on those things.”
During the pandemic, Fattal said his company was fortunate to have £150 million ($197.4 million) available to pay its debts and leases. Looking ahead, the company is going to take less risk by doing higher rent covers if it does leases again. It’s also putting a lot of cash into the company to keep it strong should another major disruption happen.
The company has 303 hotels in 21 countries across Europe, with some in the UK and Israel. Growth in those regions is a priority, Fattal said. The company started out growing its presence in major cities, but since the pandemic, it's shifted to include resort hotels as well. The majority of its hotels sit in the Leonardo Hotels brand.
During a recent asset call, the team at City Developments Limited felt the number of U.S. travelers heading abroad may be tempered by the political situation back home, said David Ling, the company's global head of hospitality investment and asset management. That meant his company had to act quickly to diversify its source markets. During the Great Recession, intra-Europe travel grew in popularity, which could repeat itself. Countries in the Asia-Pacific region are another potential source.
That’s not to say all U.S. travel will stop, Ling said, pointing to how the strong U.S. dollar is helping drive outbound trips.
About 30% of CDL's hotels are in the U.S. and Europe while 40% are in the Asia-Pacific region. Its hotels in the U.S. will be focused on domestic travel while CDL is encouraging its European general managers to look at intra-Europe travel as well as Asian arrivals.
CDL is looking at potential deals, but it’s focusing on hotels that are reasonably priced, Ling said. It’s also focusing on key global cities because of the demand they bring in.
Covivio wants to stay in Europe, mostly the Eurozone and in the United Kingdom, but it’s been shifting from Northern Europe to Southern Europe, Covivio Hotels CEO Tugdual Millet said. The France-based real estate investment trust invested heavily in Germany in the last year, and it has a strong platform of both hotels and residential properties.
“We are strong believers on the long term on this strategy, but we feel that we miss something by under-investing in Southern Europe,” Millet said, citing Spain and Italy specifically.
Europe, apart from certain cities, is not under-invested in U.S. customers, he said. Customer bases evolve after crises, such as when Russian travelers completely left the market. Despite the concern of permanently lower demand, they ended up being replaced by other travelers.
“This would be probably the case if we do not anticipate obviously a collapse of U.S. clients, but the huge flow from Asia should also help us absorb this,” Millet said.
From an investment strategy standpoint, smart hotel investors are turning their attention away from overpriced European assets, where sellers are holding firm at 6% capitalization rates and yesterday’s pricing requirements, to undervalued publicly traded lodging companies across the U.S. and Europe, L+R Hotels Group CEO Cody Bradshaw said.
Share prices have dropped considerably year to date for these companies due to all of this uncertainty for both the real estate investment trusts and even the major chains, Bradshaw said. They’re down 15% to 20% while trading at compelling yields and still likely have further to fall because of the weakening fundamentals are priced into the shares. The upcoming first- and second-quarter earnings reports will reveal the full impact.
“Why would I buy your European asset at a 6 cap in a volatile market when I can go buy a U.S. lodging REIT that's filled with luxury lifestyle, upscale properties today at a 9% cap rate, with a chance that that stock price is actually going to fall further?” he asked. “All eyes on the institutional private equity world, or I would argue, more right now on the listed lodging companies.”
Leisure rates have been normalizing after the highs of the recovery, but the government stimulus helped drive inflation in the U.S., Bradshaw said. At the same time, the S&P 500 had an $18 trillion rally since 2023, and the top 10% of earners in the U.S. now account for 50% of all consumer spending in the country.
Any change to their earnings or disposable income will have a disproportionate impact on the health of the economy as well as outbound travel, he said.
“This is already sort of set to happen, and then you layer on these government policies, which could really disrupt international travel,” Bradshaw said. “You've got all of this reflected in the share price of the public companies, partially, but not fully, so it's all influencing where capital is focusing right now, and I think the next few quarters are going to be a few of the most consequential earning seasons that we've had in recent years.”