CEO of Driftwood Acquisitions & Development, focused on the investment, development and syndication of institutional-quality hotel assets.
Now is an ideal time for patient real estate investors to consider carefully chosen hotel assets. Many U.S. hotel properties are trading for deep discounts, as distressed owners struggle to cover their expenses with sharply diminished revenue streams.
While the U.S. hotel sector is slowly recovering from the devastating impact of the Covid-19 public health threat, it will likely take a couple of years or longer before occupancy rates return to pre-pandemic levels. For investors, that opens the door to attractive acquisition opportunities supported by private equity or debt capital with the potential for outsized returns in the long-term.
However, investors need to be patient. The recovery in the travel and hospitality market largely depends on the world’s ability to manage the pandemic and potential action from the U.S. government. Whether that takes the form of a second economic stimulus or something akin to the Troubled Asset Relief Program (TARP), Congress must do something to address the looming tidal wave of hotel loan defaults and business closures as millions of jobs and vital government services are at risk. The hotel sector is made up of mostly small operators and franchisees who in turn support an entire ecosystem of even smaller businesses — from restaurant owners to Uber drivers. Hotels also provide municipalities with a significant source of tax revenue.
With those considerations in mind, it’s important to note that the long-term fundamentals of the hotel industry remain sound. Unlike the retail real estate sector, there has been no structural disruption from online competitors. That is, hotels will continue to offer real-world business and leisure travel experiences that are valued by people of all ages and backgrounds.
In fact, it would not be surprising to see pent-up demand for travel skyrocket after an effective Covid-19 vaccine or treatment is available. After an extended stay-at-home period, Americans are going to want to travel again, visiting distant family members and friends or going on long-delayed vacations. In time, business conferences and trade shows will also rebound strongly, boosting revenue and occupancies for nearby properties.
Uneven Recovery Means Due Diligence Is Essential
Today, the U.S. hotel industry has nowhere to go but up. A recent report from STR found the third-quarter occupancy level was 48%, the lowest in the global analytic firm’s database. Room rates and revenue per available room (RevPAR) were also down significantly from 2019.
Despite the drop in demand and some hotel closures, hotel developers have been busy during the pandemic. From March 1 to October 1, there were 521 properties accounting for 55,395 rooms that opened in the U.S., according to STR. While many projects have been put on hold, you still have some previously planned hotel developments moving forward, which is a sign of confidence in the long-term health of this sector.
For hotel investors, these demand and supply numbers point to the need for a thorough market analysis before