The hospitality business was among the industries hit hardest by the shut-down-inducing pandemic. However, institutional investors now see significant upside opportunities in high-quality motel and hotel assets in 2022.
This year, Värde Partners and Hawkins Way Capital formed a $1 billion joint venture to buy value-add, distressed hospitality assets in major US cities. As GlobeSt.com reports, the companies formed the venture to acquire motels, hotels, and housing assets in gateway cities at attractive discounted prices to intrinsic and potential value.
That’s just one example of why and how a growing number of commercial real estate investors and private equity funds are seizing the opportunity to acquire motels and hotels for sale.
Historical Trends of Hospitality Properties
Let’s begin by taking a quick look at performance and trends in the hospitality industry both before and after the pandemic’s impact on motels and hotels.
Performance and trends pre-pandemic
The hotel and motel industry was performing exceptionally well before the pandemic struck:
- Per Deloitte’s 2019 Travel and Hospitality Outlook report, gross hotel bookings in the US grew from $116 billion in 2009 to $185 billion in 2017
- Job openings in the leisure and hospitality industry increased from 353,000 in 2009 to 1,139,000 in 2018 as employers struggled to find talent.
- Gross operating profit per available room exceeded $26,000 for the three years.
Impact of COVID-19 on Motels and Hotels recovering from COVID-19
Post-pandemic job losses in the leisure and hospitality industry exceeded those of the retail, professional, business services, educational, and health services sectors combined. More than 50% of open hotel rooms were empty as of July 2020, with occupancy rates of below 20% being projected by many hotel operators.
Today, the leisure and hospitality sector is bouncing back, posting the highest 12-month net increase in employment among all industry sectors, according to the BLS. In 2021, the number of people working in motels, hotels, and leisure properties grew by over 2.5 million. Employment gains in leisure and hospitality accounted for over 40% of all gains in all industry sectors combined.
Future of the Hospitality Industry
The recent financial performance of the hospitality industry is not unlike economic disruptions stretching back to 1938, although losses are being magnified as COVID-19 lingers. Over the past 11 downturns, revenue per available room, or RevPAR, declined on average by 0.9%, while gross operating profit (GOP) fell by an average of 7.2%.
Hospitality industry is bouncing back in 2022
Although hotel demand dropped by 57% at the onset of the pandemic, by July 2021 overall RevPAR rebounded to 94% relative to 2019. According to CBRE’s US Real Estate Market Outlook 2022 report, international travel will serve as the catalyst for recovery in many US gateway markets:
- The hospitality sector will see higher occupancy levels from an increase in inbound international and business travel in 2022.
- Leisure travelers from Europe and Asia-Pacific will also drive increased hotel demand.
- Cities such as San Francisco and New York that were hit hard during the pandemic may benefit more in 2022.
- Resorts and all-inclusive destinations offering simplicity and price certainty will continue to be strong performers in 2022.
- Leisure-oriented hotels have been trading at pre-pandemic premiums, with pricing for group and corporate-oriented hotels also predicted to rise.
Early in the pandemic, McKinsey & Company asked the question, “How long until ‘no vacancy’ for US hotels?” The hospitality industry’s answer is to proactively make hotels and motels in the US sanitary and safe:
- Use UV lights and specialized medical-grade cleaning materials to ensure a hygienic environment for staff and guests.
- Analyze each property’s operational workflows and personnel movement to optimize space and occupation levels.
- Assess current business model and operating concept, and assess the possible reuse options such as alternative rental and lease models for specific spaces.
Prime hospitality assets attracting higher prices
Although delays in workers returning to the office and delayed business travel may have a ripple effect on business-centric hotels, investment capital is flowing into prime hotels and locations. As GlobeSt.com notes, investors are pushing pricing on the most attractive motel and hotel assets:
- Hotel investment volume totaled $20.5 billion through Q3 2021, an increase of 294% over the same period in 2020
- Attractive assets such as luxury hotels and resorts near leisure destinations are pushing sales prices higher by traditional and non-traditional hotel investors.
- Cap rates are compressing due to increased investment activity and liquidity in the hotel debt markets.
- RevPAR recovered 83% in 2021 compared to pre-pandemic comparable numbers.
- Occupancy gains are projected to increase 8% in 2022, with the average daily rate (ADR) growing by boosting average daily rates (ADRs) by 7.1% and RevPAR increasing by 15.6%
Dallas, San Antonio, Las Vegas, New Orleans, and Orlando are expected to attract more convention travel due to warmer weather, lower operating costs, and relatively fewer restrictions. Overall, motels and hotels in Sunbelt cities and drive-to destinations are expected to perform the best in 2022, while urban core hotels could continue to struggle.
Thanks to hotels operators proactive adjustments, we’re already starting to see recovery signs in the hospitality industry:
- Markets in South Carolina and Florida have seen weekend upticks in occupancy rates as house-bound individuals seek an escape from the mundane repetition of quarantined life
- Nationwide occupancy rates hit 28.6% in May, up from an average of 24% in April, a small yet positive sign of the returning demand for leisure in states with eased restrictions
- “Staycations” may become the norm of leisure travelers who opt to drive to nearby hotels and motels rather than fly to far-off states or distant countries
- Demand for economy lodging and boutique hotel properties will likely keep growing as both leisure and business travelers seek a sense of safety offered by a seamless, no-contact guest experience
Fundamentals of Investing in Hospitality Properties
When analyzing the potential financial performance of hospitality properties, there are several critical metrics to keep in mind that are most often used in the hotel industry, including:
- Total available rooms
- Average daily rate (ADR)
- Revenue per available room (RevPAR)
- Average occupancy rate
- Gross operating profit per available room (GOP PAR)
- Total revenue per available room (TrevPAR)
Hospitality Property Trends by Region
There are three key leisure and hospitality industry trends to watch for in 2022:
- Rise of affordable lifestyle hotels
- Emergence of first-time hotel buyers
- Increase of the hospitality operating model
Generalists and international investors are expected to drive transaction volume in the hospitality industry, with highly-liquid markets such as Florida and California seeing some of the strongest activity.
Hotels for sale in Florida
Miami and Orlando are two apparent contenders to consider when looking for hospitality property for sale in Florida. However, other regions to consider for investing in hotels and motels in Florida include the markets of Broward County, especially Fort Lauderdale, and the Florida Keys.
Hotels for sale in California
The Southern California hospitality markets of Los Angeles, Anaheim/Santa Ana, and San Diego are being affected differently. For example, the recovery in LA depends on how quickly the entertainment and convention industries recover. Investors looking for hotel and motel property in Northern California may have a window of opportunity to acquire reasonably priced property in highly desirable gateway cities such as San Francisco.
Hotels for sale in Texas
Before the recession, major metros areas such as Austin, Dallas, and Houston were generating some of the top performance numbers in the US. As the economy recovers, investors focused on hotel and motel property for sale in Texas should monitor these key markets, along with secondary and tertiary markets like Midland and El Paso.
Hotels for sale in South Carolina
Although the three largest metro areas in the state – Greenville, Columbia, and Charleston – all have less than one million residents, hotels and motels for sale in South Carolina could offer affordable lifestyle hotel investments as the economy begins to cycle upward.
Hotels for sale in Virginia
Hospitality properties in smaller cities such as Virginia Beach and Williamsburg may benefit from an increased demand from the “staycation” leisure traveler. Commercial property investors looking for a hotel or motel for sale in VA that rely on business travelers may find submarkets such as Newport News/Hampton Roads a good choice. About 80% of the region’s economy comes from federal government sources.
Hotels for sale in Colorado
With the pause and limited capacity reopenings of retail and restaurant activities, cities with proximity to nature and nature-driven activities are seeing a rise in housing demand. This move to nature-rich cities such as Denver and Boulder Springs should benefit local hospitality businesses as staycations become the preferred getaway.
Hotels for sale in Michigan
Investor activity is turning an eye towards hospitality properties in Michigan, including the recent sale of the notable Hotel Iroquois on Mackinac Island by a long-time patron of the hotel. Similar to Colorado’s market, the nature-rich opportunities in Michigan will likely attract local or nearby patrons in search of a staycation, serving as an attractive option for hospitality investors looking to purchase a hotel or motel for sale in Michigan.
The demand for hotels and motels in the US will eventually return, albeit differently. Depending on each sector, business travel will likely return unevenly, with Sunbelt markets such as Las Vegas, Dallas, and Orlando the first to break out and attract more convention travel. Prime hotel properties in gateway cities may benefit from the resumption of inbound international travel. In contrast, other lodging and hospitality properties will generate a higher share of close-to-home travel to locations that can be reached by car in one day or less.