As real estate investors look through all of the global economic uncertainty, the strong recovery of the hotel industry continues to attract their capital.
JLL’s new Global Hotel Investor Sentiment Survey found that investors’ appetite for hotel assets is growing alongside the industry’s recovering performance. In an interview with Hotel News Now, Gilda Perez-Alvarado, global CEO for JLL Hotels & Hospitality Group, said that while inflation and efforts to fight it are the biggest headwind for the industry, the momentum of the recovery is continuing with performance in many cases surpassing pre-pandemic levels.
JLL is watching to see what effect inflation will have on disposable income and travel patterns, she said. However, with markets still mostly limited to domestic travel and the demand segments performing as well as they are with more room to grow, there’s a lot of positivity among investors who see the strength of the fundamentals, she said.
One of the biggest differences between the current economic situation and prior downturns, including the Great Recession, is liquidity, she said.
“There’s a ton of liquidity worldwide looking for a home, looking for investments,” she said. “Hotels, given our ability to change rates or adjust rates in real time — not even daily, in real time — they present a very interesting asset class for investors worldwide.”
Survey Findings
In breaking down the investor profile, the survey reported that 52% of respondents were private equity, institutional investors, and investment fund entities; 26% were developers; 15% were hotel operators; 5% were sovereign wealth funds and corporate venture capital while the remaining 2% were real estate investment trusts.
Among respondents, 20% of investors said they intend to deploy anywhere from $501 million to more than $1 billion worth of capital into hospitality, an increase from 7% of investors in 2021 and the highest proportion of investors looking to spend that level of capital since the start of the pandemic.
Nearly 80% of investors said they expected to be net buyers this year while 82% said they were targeting value-add investment opportunities. Fifty-seven percent said they believe the best investment opportunities over the next six months will emerge from more traditional hospitality property types, including full-service and select-service hotels.
Fifty-five percent of investors said they expect their all-in cost of debt will increase 50 to 100 basis points relative to the beginning of the year. Investors named high inflation and uncertainty over the industry’s full recovery as their two biggest challenges in today’s environment.
Among global markets, Boston, London and Tokyo came out as the top three markets for hotel investment. The top three markets for divestiture were New York, Paris and Shanghai.
Boston’s improved operating performance, thanks to leisure travel, convention conferences and corporate travel, has attracted investor interest, the survey said. The market has a growing life sciences sector, further diversifying its demand generators. Boston is gaining new hotel supply, including the Raffles Boston Back Bay, that is expected to help raise the rate ceiling.
London is a longtime global gateway market with stable hotel investment activity achieving more than $2 billion annually over the last three years. The lifting of COVID-19 restrictions accelerated the market’s recovery pace, and that is expected to increase further through the end of this year and into 2023.
Although Tokyo has been recovering at a slower pace compared to Boston and London, its high levels of domestic demand have pushed the market’s recovery. The room nights sold July 2022 year to date grew 66% compared to the same period in 2021, with upscale hotels achieving the highest growth. The market is expected to outperform the rest of the country and, with slower supply growth projects for the next two years, existing supply should continue to see stronger performance.
Although New York’s recovery pace is increasing, its occupancy remains 17.2% below 2019 levels, suppressing revenue-per-available-room growth. The cost of doing business in the market is also higher compared to other locations.
In Paris, performance is above 2019 levels for RevPAR and rate. Those factors coupled with the “lack of quality product available for sale” is motivating owners to consider selling, and buyers are likely to meet their prices.
China’s strict COVID-19 restrictions have challenged Shanghai’s performance, with RevPAR down approximately 33% in July year to date compared to the same period in 2021 and 44% compared to 2019. Owners there are struggling to maintain positive cash flow.
Investment Opportunities
Investors are looking for value-add opportunities, seeking properties that need a comprehensive turnaround, Perez-Alvarado said. In New York City, for example, there technically isn’t a single hotel that has stabilized, she said.
“By default, all of these are value-add plays,” she said. “They’re taking properties that have been operating in a distressed environment and maybe need a targeted renovation or comprehensive renovation. There are repositionings.”
Investors are taking into consideration whether an available property is unencumbered by brand or management company, she said. That could require choosing the right operator to put in place. They may need to rethink a property’s food-and-beverage operations given lessons learned from the pandemic.
Select-service hotels have made up more than half of the single-asset liquidity in the U.S. this year, Perez-Alvarado said. They have efficient operating models with good profit margins, making them a great investment, especially when going through economic uncertainty, she said. On top of that, many select-service properties are still relatively new.
Select-service hotels will continue to do well in the primary markets and city centers, but they’ll also perform in secondary markets, she said.
“Just from a yield profile perspective, they’re a very, very attractive asset class,” she said.
When it comes to full-service hotels, investor interest is market-specific, Perez-Alvarado said. Urban hotels that saw a lot of demand from business travel have been waiting for that segment to return. Companies that want to grow will need to travel, as clients will expect to see them in person, she said. New businesses have emerged since the start of the pandemic, and international corporate travel will return as more restrictions end.
“It's not like we're talking about a static piece of the pie,” she said. “It just keeps on getting bigger in terms of corporate demand as new corporations are getting set up.”
Corporate travel will return, perhaps not back to the same level as before, but there has been a growing level of bleisure travel, she said. Hotels that saw more corporate travel may change up their offerings to attract a strong weekend leisure component.
When investors look at urban full-service hotels, they’re thinking about how they’ll recover and what changes they would need to make, she said.
Select-service and resort properties continue to be attractive targets, but investors are looking at pockets of value where pricing is below 2019 levels and demand should recover, and they can see that in full-service hotels, she said.
“We’re seeing people get back to the office, we’re seeing international travel come back,” she said. “It’s demand that is still growing. Your best value-add opportunity is in city center, full-service hotels.”
Hotel valuations will still vary market by market and even asset by asset, Perez-Alvarado said. From a performance perspective, hotels are improving and yielding better cash flow. At the same time, the cost of debt is increasing, and that affects values as well. There’s also the supply-and-demand dynamic for available assets at play.
Aside from resorts, which have been trading at record-level prices throughout the pandemic, the jury is still out on hotel pricing as hotels haven’t returned to peak levels, she said. The average price per key is peaking, and the industry continues to outdo itself in this metric every single cycle.
“From a general market perspective, we cannot generalize at the moment right now,” she said. “It’s asset-by-asset specific.”