An Uneven Recovery Is Likely for Hotels

At the start of the pandemic, hotel investment froze along with the rest of commercial real estate, but while other markets have thawed, mandated travel bans and subsequent outbreaks of COVID-19 have prevented the hotel market from recovering. In a blog post published by Preqin, John McCourt and Ryan McAndrew of RSM US LLP predict that deal flow won’t return until 2022 to levels seen before the pandemic. But when it does return, it will likely come in fits and starts depending on the asset type, its location and the financial status of the owner.

There are several factors contributing to the decrease in deal flow, starting with a mismatch between buyers and sellers on pricing, according to McAndrew and McCourt. Government relief is also playing a role in poor deal flow as investors are uncertain about what will happen when government relief decreases or expires.

When investment activity does start to rebound, McAndrew and McCourt believe that good assets will continue to be in demand. They note that there is a difference between “a distressed asset and a distressed owner.” An owner that is in distress with a quality asset will continue to see demand. Those deals could rebound earlier, even in 2021. Distressed assets, on the other hand, will not see a return in investment demand for sometime.

They also note that not all hotel assets have performed the same during the pandemic. Drive-to destinations became the best option for people willing or wanting to travel during the pandemic, and hotels in those markets barely decreased during the pandemic. Florida Panhandle, the Gulf Coast and Mid-Atlantic markets, for example, are doing well. Extended stays and limited service hotels are also performing well during the pandemic, as are hotels near college campuses, because students have been quarantining in hotels during COVID-19 outbreaks on campus.

By contrast, urban or suburban group convention-focused hotels, are hurting, and they will likely see a long road to recovery, according to McAndrew and McCourt. Recovery for other hotel segments will be market dependent. Many hotel executives are expecting China to recovery more rapidly than other markets, with predictions that occupancy will rebound to pre-pandemic levels as early as next year. Chinese hotels have put strict protocols in place that could provide a roadmap for US hotels to follow.