Private Equity Will Drive Hospitality Liquidity in 2021

Private equity and institutional investors have started to return to the hotel market, a trend  that began in the second half of 2020. According to research from JLL, private equity and institutional investors were responsible for 54% of total hotel transactions last year and  they are likely to remain active in the market this year, driving investment activity.

Last year, private equity alone raised $24.5 billion in closed-end funds for hotel investment. This matched 2016 investment levels, and it will likely provide the majority of hospitality investment this year. While investment globally has focused on resort markets, private equity groups deployed capital across asset classes with a specific focus on distressed investment. This has created opportunities for non-traditional investors to participate in the space.

Half of all hotel transactions occurred in the first three months of 2020, before the onset of the pandemic. However, more liquidity will help to drive transactions in 2021, and resort properties will likely get most of the attention with JLL predicting this category will account for 35% of total hotel investment volume this year.

While this boost in liquidity is good news for hotel investment, the pandemic has certainly catalyzed significant changes for the sector. First, the industry is rapidly adopting what JLL calls the manchise structure, a brand management contract that can be adapted into a franchise agreement. The structure gives operators more flexibility while also reducing fees.

JLL is also anticipating massive redesign of hotel rooms and more technology adoption in 2021. First, hotel room designs will need to accommodate user preferences for a more individualized and socially distanced experience. With widespread remote work policies, many travelers are also looking for spaces that can accommodate both work and live areas. Likewise, the pandemic has accelerated the adoption of touchless technologies and contactless services for everything from food delivery to check-in and check-out.

The pandemic is also introducing changes at the investment level as well. Investors are adopting ESG policies, including the development of diversity and inclusion initiatives across all industries, particularly at the upper management level, according to JLL. The firm anticipates that ESG policies will step into the spotlight this year and will drive investment decisions and consumer decisions about where to stay.

The latter trend is already taking off. Last year, several companies renewed their commitment to ESG. In December a survey from Willis Towers Watson found that many companies were also going so far as to link employee pay to ESG goals. Most companies—four in five or 78%—are planning to change the way that executive incentive plans incorporate ESG over the next three years; four in 10 companies plan to introduce ESG into long-term incentive plans over the next three years; and 37% of respondents plan to introduce ESG into annual incentive plans over the next three years.