This Slice of the Hotel Sector Has Weathered COVID-19 Surprisingly Well

Hospitality has been hit as hard as any CRE sector from COVID. In the wake of travel bans, the cancelation of business conferences and the economic downturn, hotels have sat empty.

As vacancies have risen, trades in the hotel sector plummeted. Real Capital Analytics says transaction volume in the sector fell by more than two-thirds compared with 2019, which was the lowest level since 2009.

But not all hotels saw the same declines. In a new post RCA reports that the sales market fell only 22% for economy branded hotels, which showed a clear investor preference. Surprisingly, the only CRE sector that performed better was industrial. 

Economy-branded hotels have also seen their market share grow. Investment in these hotels made up an average of 5% of the market between 2015 and 2019. RCA says that number climbed to 16% in 2020. Also, 30% percent of total hotel investment went to midscale hotels.

The popularity of economy-branded hotels lies in perceptions about the recovery. The primary occupants of economy and midscale hotels are leisure travelers. On the other hand, the higher end of the market is driven by business and group travel, according to RCA.

There is a strong sentiment that leisure travel will recover more quickly than business travel. Investors are focusing on economy hotels, where they expect a more secure income stream.

When economy hotels sold in 2020, there was little distress. RCA says less than 1% of the sales volume of economy chain hotels involved a distressed asset, while distress sales were 12% of the luxury market in 2020. Out of all 2020 transactions for upscale hotels and midscale hotels, distressed sales represented 7% in each category.

RCA says distress sales will represent a redevelopment opportunity. Eight percent of hotel investment volume was from groups who intended to redevelop those assets. The transaction share from investors who intend to redevelop hotel properties is the highest since 2008.

Those investors who can secure hotels at distressed pricing are likely to outperform, according to historical trends.

Private funds with exposure to hotel properties formed in the years following the Global Financial Crisis yielded higher net IRRs than previous vintage years due to lower valuations, Jared Bochner wrote in a Preqin blog post. 

Even though hotel transactions have been down during the pandemic, it is clear that hotel valuations have eroded during the pandemic, and it is now a buyer’s market, according to Preqin.

Matt Rooney, vice president at TriGate Capital, tells Preqin that lower valuations result from various factors, both pre-existing and COVID related. The dislocation in hotel fundamentals has made hotel pricing more attractive than it was pre-pandemic.