Lessons learned
Hotels do not operate in a vacuum. They are an integral part of an overall economic community within the geographic area where they are situated. The health of other commercial real estate assets is impacted by the same factors as hotels in that area. Understandably, there are different risk elements attached to each asset class, resulting in a range of expected returns on both debt and equity investments.
Lessons from the COVID-19 pandemic (2020-2022)
- Hotels were considered too important to fail as government support (to an extent and varying by region), lender patience and brand cooperation (particularly on cap ex) helped prop up the industry.
- Leisure assets (i.e., resorts) proved more resilient than urban assets as people were restricted from cross-border travel, boosting “staycations.”
- Remote work options took hold, generating a new customer segment blending leisure and business trips (aptly named the “bleisure” segment).
- Maximizing available outdoor space at hospitality assets became more meaningful.
- An anticipated abundance of deeply distressed hotel sales did not materialize.
- Several hotels were acquired as “change of use” investments.
- Pent-up travel demand appears to be recovering with strength.
- Construction cost increases related to supply chain issues will limit new construction.
- Diversification is important.
Lessons from the Global Financial Crisis recovery (2009-2019)
- Both ADR and Occupancy recovered annually to record levels achieved in 2018 and 2019 in many markets.
- General economic recovery mirrored hotel performance results.
- Daily pricing power of hotels tends to recover beyond CPI during growth periods.
- Branding and loyalty programs became more important to investors and lenders as they offered a “base” of business through global distribution (GDS) and central reservation (CRS) systems and brand proliferation.
- Valuations amongst all real estate asset classes grew through improved returns and cap rate compression.
- Transparent market performance metrics became more accessible (in most markets) through data companies such as STR.
- New market entrants (e.g., Airbnb and Expedia) affected the industry.
- Hotel REITs survived, then flourished.
- An anticipated abundance of deeply distressed hotel asset sales did not materialize.
Overall takeaways from periods of crisis
- Don’t panic, especially if you don’t have to.
- Investment, brand, management and lender partner agreements should have aligned interests.
- Due to the lower market liquidity attributes, a patient long-term commitment to the asset class will yield more beneficial results.
- They are a capital-intensive investment.
- Deferring capital and ROI investment opportunities adversely impacts value. A full understanding of capital expenditure requirements (i.e., brand-driven PIPs) is key.
- Financing attributes differ significantly (i.e., lower leverage and higher spreads) from other CRE assets.
- Hotel performance is linked to overall economic factors.
- Valuations ebb and flow with other real estate asset classes.
- Neither a global financial crisis nor global public health crisis resulted in deeply distressed hotel sales.
- Hotels are riskier real estate assets resulting in a yield premium for both debt and equity.
- Market transparency and access to improved third-party expertise has expanded.
- Diversification is crucial.
Turning knowledge into strategy
Real estate investment knowledge accumulated through periods of growth, decline, recession and financial and health crises is invaluable. No real estate asset class, including hotels, operates independently of macro or micro economic factors impacting any market. Since real estate is cyclical, each class has unique attributes that benefit or hinder potential results depending on the position within the business cycle.
Hotel real estate investments have typically offered a unique hedge against inflation since pricing can be adjusted daily. This has placed hotels among the riskier asset classes, but that translates into greater yield potential. Presently, the global economy is facing an
inflationary period and a rising interest rate environment. This could imply significant yield potential for both debt and equity investments within this asset class.
Over that last two decades, hotel market performance has become more transparent in most markets. Hotel financial reporting has adopted a uniform system of accounts, allowing for easier comparison across the industry. STR is the dominant firm tracking occupancy and ADR results across markets and several new firms have started to use data to create useful predictive analytics tools for hotel investors, allowing that collected knowledge to be turned into effective investment strategies.
Get more market information
Curtis Gallagher* Principal, Canadian Hospitality Lead +1 416.673.4018 curtis.gallagher@avisonyoung.com
Jolene Keats Director Eastern Canadian Hospitality +1 902.579.1245 jolene.keats@avisonyoung.com
Haig Basmadjian Senior Associate Western Canada Hospitality +1 403.232.4316 haig.basmadjian@avisonyoung.com
Bobby Singh* Associate Eastern Canadian Hospitality +1 905.283.2326 bobby.singh@avisonyoung.com
Graeme White* Associate Eastern Canadian Hospitality +1 647.598.2318 graeme.white@avisonyoung.com
*Sales Representative
© 2022 Avison Young Commercial Real Estate Services, LP, Brokerage. All rights reserved. E. & O.E.: Some of the data in this report has been gathered from third-party sources and has not been independently verified by Avison Young. Avison Young makes no warranties or representations as to the completeness or accuracy thereof. Investment sales and hotel market data sourced from Avison Young, Altus Data Studio and STR.