Hotels are one of the major CRE asset classes, along with multifamily, office, retail, and industrial. At EquityMultiple, we believe hotels can be a welcome addition to any investor’s portfolio, particularly for those who are risk-tolerant and gravitate toward higher potential upside. As of November 2023, JLL reports that investor sentiment toward hotels has been positive, with more survey respondents expressing a renewed sense of optimism in hotel investment activity.¹ So, how can self-directed investors capitalize on what we believe to be a unique market opportunity?
This article provides insight into hotel investment for investors who may not be familiar with this asset type’s nuances. We will explain how hotels are different from other commercial real estate assets, how sponsors can generate value, and a few helpful metrics to understand. We will also provide an update on the current state of the hotel real estate sector, including its continuing pandemic recovery.
About Hotel Investment
While the hotel sector may seem potentially interesting at this time, remember that all hotel investments are not equal. Here’s what investors need to know prior to committing funds:
Pricing is Variable
One key difference between hotels and other CRE assets is that operators typically rent rooms out daily, rather than asking tenants to sign leases on an annual or multi-year basis. This allows the flexibility to set prices to match demand. On a holiday weekend or during a large conference, for instance, you might see a spike in the cost to book a room, whereas the same room would cost less off-season or even mid-week.
Keep in mind, of course, the price travelers are willing to pay likely also depends on the type of hotel:
- Full-service: These hotels provide numerous upscale amenities, including on-site restaurants, banquet rooms, meeting rooms, and spas. Well-known brands such as Marriott, Hilton, Hyatt, St. Regis, and Ritz-Carlton are part of this category.
- Limited-service: Limited-service hotels offer some amenities, although not as many as you would get from a full-service hotel. You may be familiar with this experience if you’ve ever stayed at a Hampton Inn, Holiday Inn Express, or Fairfield Inn. At a minimum, guests receive access to a fitness room, pool, and small meeting spaces.
- Budget: Budget hotels like Super 8, Travelodge, and Econolodge offer few amenities, as their primary goal is to keep costs down.
- Extended stay: Designed with longer-term guests in mind, these hotels often feature suites with access to a kitchen and laundry.
Operations are Crucial
Think about the last time you traveled. Did you stay in a hotel? If so, were you satisfied with the experience?
Some hotels are extremely well-run, while others are quite the opposite—run-down or dilapidated, with a host of management problems. As with other property types, you’ll want to understand the current management strategy, and any proposed changes the Sponsor would like to make. If it is a distressed asset or value-add opportunity, take a close look at the Property Improvement Plan (PIP).
Hotel Investment Metrics
To measure the performance of a hotel asset, investors need to understand two primary metrics: the Average Daily Rate (ADR), and the Revenue Per Available Room (RevPAR).
- Average Daily Rate (ADR): The Average Daily Rate is the average per-room income per period of time; in other words, the total room revenue divided by the number of rented rooms for a given period.
- Revenue Per Available Room (RevPAR): RevPAR (or “revenue per available room”) is another metric hotel investors use to measure operating performance.
To calculate RevPAR, simply take the Average Daily Rate, and multiply by the Occupancy Rate. To take an example, let’s say a hotel has a total of 150 rooms, of which the average occupancy rate is 70%. The average daily rate for a room is $100 a night. Therefore, the RevPAR would then be 70% of $100, or $70.
A Note on Market Volatility
Travel expenses may be the first to go when individuals—or even companies—need to tighten their budgets. Successful hotel operators understand this, and may adjust their pricing strategies as needed to address economic challenges. Even in the best of times, however, competition can be tight, so it’s important to consider your personal risk tolerance prior to investing.
To put things into perspective, let’s look at the impact of COVID-19 in the early 2020s. Generally, demand for hotels comes from two primary travel categories: business, and leisure. The pandemic disrupted both of these categories. Corporate clients who would normally hold room blocks for extended periods of time put their plans on pause, opting to host meetings over Zoom rather than in person. On top of this, many casual travelers were not comfortable staying in hotels due to health and safety concerns.
That said, the hospitality industry has seen a strong recovery, and we believe there is reason for continued optimism.
Hotel Recovery
At the beginning of the 2020s, the US hospitality industry was severely impacted by the COVID pandemic. Performance has largely seen fluctuations negatively correlated with national COVID-19 case counts, and while the industry was hurt in 2020, metrics have shown upward trajectories from 2021 to present-day.² May 2024 RevPAR results marked the strongest growth since May 2023, and the majority of markets (three quarters) experienced RevPAR expansion in May, the highest percentage of markets with positive growth since at least January 2024.² RevPAR is perhaps the most significant performance metric for a hotel investment.
Aside from September 2021 and January 2022, when the US saw upticks in COVID cases from the Delta and Omicron variants respectively, since January 2021, occupancy has shown steady improvements.² Average daily rates surpassed 2019 levels beginning in July 2021 and mostly continued thereafter.² In tandem, these have led to RevPAR, perhaps the most significant performance metric for a hotel investment, to increase and finally exceed 2019 levels in the holiday season of 2021.²
Travel
Of course, much of this increased demand is attributed to increased travel. As of April 7th, TSA throughput is back to running at where it was in 2019.³
Corporate travel has increased in tandem with employees getting back to the office. An uptick in large transactions drove Q2 2024 leasing volume to its highest level since the onset of the pandemic.⁴
Economic Activity
GDP and hotel demand have been known to historically have a strong correlation.⁵ 2024 GDP growth was positively revised on expected strength in Q2.² While there are, of course, some concerns related to inflation, interest rates, and geopolitical uncertainty, this may be good news for the performance of the industry going forward. Broader trends related to the pandemic have continued to subside, helping to stave off the key detriment to the hospitality sector over the past few years.
Expectedly, not all slices of the hotel asset class have supported the broader sector’s recovery equally. For example, upper-scale hotels outperformed in May 2024, while lower priced hotels have continued to struggle.² Additionally, May 2024’s RevPAR growth was primarily fueled by hotels in Las Vegas, New York City, and San Francisco.²
The Bottom Line
We are cautiously optimistic about the hotel sector, particularly in a high-inflation environment. After all, inflation favors hotels because leases effectively turn over by the day (or every couple days), so operators do not have NOI undercut by rising prices like you would in an office lease, or even a month-to-month apartment lease.
EquityMultiple’s Investments Team will monitor market dynamics as they continue to evolve. If you would like to learn more about EquityMultiple’s perspective on hotel investing or any other asset class, please feel free to schedule a call with Investor Relations.
1 Source: JLL Global Hotels Investor Sentiment Survey, November 8, 2023
2 Source: CBRE Hotels Research, U.S. Hotels State of the Union, July 10, 2024
3 Source: TSA Travel Checkpoint Numbers, July 25, 2024
4 Source: JLL Office Outlook (as of Q2 2024)
5 Source: 4Hoteliers, July 30, 2009