In 2020, U.S. hotels suffered the greatest loss in occupancy levels in 2020 since the Great Depression, according to a fourth quarter report from real estate services CBRE. Annual occupancy dropped by an average of 41.6 percent. Revenue per room (RevPAR) was down 55.5 percent compared to 2019 figures.
Luxury and upscale chain hotels experienced the greatest deterioration in property fundamentals during the year, with occupancy down 65 percent on an annual basis and nearly 72 percent in the last quarter of 2020. Lower tier hotels posted less severe declines in occupancy, but still remained below 50 percent.
Value-priced hotels, especially those in the extended stay category and featuring kitchenettes, continued to operate during the pandemic and served as second homes for many medical and emergency services personnel who lived there to avoid infecting family members with COVID-19, notes Scott Berman, principal at consulting firm PwC and industry leader for hospitality and leisure with the group.
“The hotel industry’s short ‘lease’ structure and dependence on recurring business and leisure travel left it particularly exposed to the shelter-in-place mandates and the economic shock than ensued,” says Rachael Rothman, CBRE head of hotels research and data analysis.
She suggests, however, that just as the decline in the sector was sudden and steep, recovery could surprise to the upside. “We are seeing steady improvements in occupancy levels, travelers passing through TSA, and the highest level of net airline tickets purchased in months,” Rothman says. “The pace of the recovery will largely be dependent on the pace of the vaccine rollout, and the amount of flexibility in large corporations’ travel budgets.”
Kevin Mallory, global head of CBRE Hotels, a global services platform focused on the hotel and leisure-lodging sectors, also feels optimistic about the sector’s recovery. CBRE Hotels’ expectation is that as the certainty about the U.S. economic recovery and exit from the pandemic improves, investors will become more aggressive, especially in the hardest hit segments of the hospitality industry, where the best deals could be had.
Recovery timeline
However, Mallory admits that the U.S. hospitality industry isn’t expected to fully recover to the occupancy and RevPAR levels seen in 2019 until the year 2025. But the recovery will also take place faster in certain segments of the market. For example, he notes that resort and select-service hotels in drive-to destinations in the Sunbelt, in coastal markets and in leisure destinations that are easily accessible to major urban centers will likely recover first. These destinations would include places like Virginia Beach, Va., Charleston, S.C., Savannah, Ga. And Santa Barbara, Calif.
Overall sector recovery will be gradual, agrees Berman. But “hotels in resort locations near mountains, beaches and lakes did well during this (pandemic) and will continue to do well.”
Leisure travel has already started to ramp up and is now leading the U.S. lodging segment, says Adam McGaughy, senior managing director in the hotels and hospitality group of real estate services firm JLL. Even at the height of the pandemic, drive-to resort destinations were in relatively strong demand, with work-from-home policies allowing workers to visit destinations with warmer weather, he notes. Now, “we are starting to see weekend demand return to most major U.S. cities as restrictions are eased and hotels entice travelers with attractive low rates.”
Berman stresses that location will continue to be key. “A roadside hotel is positioned to do better than a hotel in a downtown metro,” he says.
The recovery of full-service, luxury hotels in urban centers like New York and San Francisco, is expected to lag, agrees Mallory. That’s because those hotels derive a lot of their revenue from business travel, corporate meetings and other events, as well as international travel, and all of those types of stays are expected to lag the overall recovery. U.S. businesses eliminated most travel from their 2020 budgets and aren’t likely to add it back until 2022 or 2023, Mallory says.
Corporations sponsoring industry conferences and other events are in no hurry to bring hundreds of people together in enclosed spaces, he adds, noting that these events are not expected to resume for two to three years, and event planning has to be factored into the timeline.
“Many office buildings and corporations still have tight travel and visitor policies that may restrict growth in corporate transients in the near future,” says JLL’s McGaughy. But he believes that as vaccination increase, more people will feel safe traveling and the resumption of trade shows and industry events will induce companies to fund this type travel.
“There’s simply a better ROI proposition from corporate spending for large meetings versus individual business travel, as many companies and associations fund much of their budget based on the significant revenues generated from attending major trade shows and events,” he notes.
Investment picture
Meanwhile, hotel owners with assets in core markets are bearing the brunt of the pandemic’s impact, as the burden of keeping the lights on falls on them rather than on the brands managing the properties, says Berman. But so far, investors haven’t taken advantage of the distress in the sector at any great scale.
While some hotels did trade hands in 2020, investment sales volume in the sector dropped by 68 percent compared to 2019, to $12.2 billion from nearly $39.0 billion, reports CBRE.
“The industry is still trying to calibrate where values are going, so it’s an evolving story,” Berman says, noting there’s currently a disconnect between what sellers are asking for and what buyers are willing to pay.
Hotel transaction activity did begin picking up in the last quarter of 2020, as the vaccine rollout got underway and investor confidence improved, according to Mallory.
Pointing to the uptick in air travel, McGaughy suggests that investors may be reacting to a recovery that is already underway. “My sense is that while some of this is priced into the public hospitality REITs and C corporations, the market is also reacting to shrinking losses these organizations are reporting that generally beat analysts’ expectations,” he says.
Data points collected over the last nine months of 2020 suggest a varying decline in hotel values based on differences in service level, chain scale, location type, price tier and demand sources, reported Tommy Crozier, CBRE national practice leader, CBRE Hotels Advisory, in a recent CBRE whitepaper.
Lower-tier, economy and midscale hotels in interstate highway locations, for example, have witnessed the least disruption in operations and in values as they continue to accommodate essential workers, transportation professionals, healthcare workers, construction crews, and leisure guests, Crozier notes.
Recent investment sales suggest a bottom-up recovery, according to data firm the CoStar Group. For example, earlier this week a partnership of Blackstone Real Estate Partners and Starwood Capital Group announced the acquisition of Charlotte-based Extended Stay America and its paired-share real estate investment trust, ESH Hospitality, for $6 billion in cash, or about $19.50 per share.
Six other hotels also traded recently, according to CoStar, including:
- The 102-room Killington Mountain Lodge in Vermont was sold to MRC, a Hilton property affiliate, for an undisclosed price;
- The 7,092-room Venetian Resort Las Vegas and Sands Expo and Convention Center was acquired by a partnership of Vici Properties and Apollo Global Management, for $6.25 billion;
- The 325-room Magnolia Hotel in Dallas sold to Grapevine, Tex.-based NewcrestImage, a hotel management and investment firm, for an undisclosed amount;
- The 245-key Courtyard San Diego Downtown was sold to Pimco, a Newport Beach, Calif.-based investment management firm, for $64.5 million;
- Courtyard by Marriott Denver-Aurora was picked up by Legendary Capital, a North Dakota hotel REIT, for $27.9 million; and
- The 132-room, extended-stay Hyatt House Frisco in the Dallas market sold to an undisclosed investment firm located in the Northeast for an undisclosed sum.
Mallory says that lender interest and a tremendous amount of equity chasing hotel deals are fueling the current uptick in investor and seller action. He notes that a number of major investment firms, including Blackstone, Starwood, Brookfield and Softbank’s Fortress, have established funds to target distressed hotel deals.
“A record amount of equity was raised to invest in the hotel sector under the theory that there would be widespread distress and the ability to purchase quality assets for a significant discount to their pre-COVID valuations,” adds McGaughy.
So far, “Durable and attractive assets are trading within 10-15 percent of 2019 values,” according to Mallory. He notes, however, that non-durable and less desirable assets have and will continue to trade at steeper discounts of between 25 and 40 percent.
For example, the 310-key Royalton Hotel, Embassy Suites in New York’s Garment District, sold in September 2020 for $115 million, or 41 percent below the $195 million the seller, Ashford Hospitality Trust Inc., paid for it 18 months prior
McGaughy notes that in the early stages of the pandemic significant distress opportunities were certainly expected, as loan delinquency in the sector shot up by double digits in June 2020. But the massive wave of distress everyone anticipated never came about.
“There’s likely to be some discounting, but no rapid deceleration in values has occurred,” says Berman, who adds that there is strong sponsorship behind many hotel portfolios.
Instead, according to McGaughy, a scarcity of available product on the market has led to increased competition and strong value recoveries nearing pre-pandemic levels.
Mallory believes the shortage of available properties for sale will reverse itself as hotel owners complete debt workouts with lender and place properties on the market later this year.
In the meantime, McGaughy says that many of the investors that were seeking distressed opportunities are now focused on acquiring high-quality hotels, with a keen eye towards assets in drive-to resort destinations, which proved resilient throughout the pandemic.
