Proven Hospitality Investment Principles Still Apply Despite Pandemic's Effects on Hotel Industry, Investor Interest Still Present
By Rick Takach | HNN columnistOctober 5, 2021 | real estate markets, including hospitality, are no strangers to periodic economic cycles.

The abrupt and unforeseen nature of the COVID-19 pandemic should really be viewed as a disruptive and unprecedented event, much different from the typical slow windup and eventual slowdown of an economic cycle. The attempts to mitigate the virus spread via restricted travel and stay-at-home orders in various parts of the country over the past 19 months proved to be a longer-term consideration for nearly all commercial real estate asset classes.

In the deepest days of the pandemic, comprehensive stay-at-home orders halted both business and leisure travel and forced many traditional office professionals to work from home. This intentional disruption curtailed business travel, and new consumer patterns emerged — as did investor attractiveness to different real estate investment classes. Those asset classes that performed most favorably during the pandemic included multifamily housing; warehousing and distribution facilities; commodity retail, such as retail giant Walmart, pharmacies, grocery stores; and specialty areas such as data centers, self-storage facilities and, in some cases, medical facilities. Many office, retail and hotel properties, particularly those in downtown business centers in major cities, faced significant challenges.

Despite the challenges, hotel valuations have remained reasonably stable in light of the pandemic-driven performance. At the same time, we are witnessing excellent availability of capital for hotel investments recognizing forthcoming pent-up demand opportunities and lack of new supply.

Several factors may be at play here. These include the presumption that funds allocated to purchase what were expected to be bargain-priced assets are still sitting on the sideline. Other considerations are portfolio diversification; how well some properties have performed during or just coming out of the pandemic; and the long-term viability of hotels as an asset class; i.e. potential for asset appreciation as both leisure — shorter-term — and group business travel — longer-term — recover.

The CBRE 2021 U.S. Real Estate Market Outlook reports that from 2000 to the present, cap rates for hotel properties have tracked well above office, retail, industrial and apartment properties, exemplifying the investment appeal of hotels. Interestingly, CBRE noted that for capital markets as a whole, there is a disconnect between buyers and sellers on pricing, with 61% of buyers seeking discounts, while only 9% of sellers were willing to offer them. Sound familiar?

Spending Wisely

Simply stated, it requires discipline to adhere to prudent, well-proven underwriting guidelines to avoid overspending in the short and long terms. Remember these guidelines when looking to buy.

Believe in the location and the opportunity. Believing in a location means understanding its intrinsic geographic location, market segment and community appeal; its existing and prospective demand generators; and long-term potential for asset appreciation. As we’ve seen, secondary and tertiary markets can be excellent “contrarian” investments in today’s hospitality climate.

Achieving value-add potential of a hotel investment entails looking at a broad range of factors. What are the property’s existing and potential competitive sets? What are prospective remodels or reconfigurations and projected return on investment? Does a change in brand or chain scale, if possible, make sense? Can we develop new revenue streams at the property? Perhaps, most importantly, how can we improve property management to streamline costs, increase operating revenue and enhance guest satisfaction?

Remodeling and repositioning of a property directly relate to its appropriate capitalization. What renovations will improve competitive position and best achieve those value-add possibilities? Also, have basic maintenance or property improvements been deferred or neglected? This will be extremely important as we underwrite properties post-pandemic, as many entities had to divert budgeted capital-expenditure dollars to debt service and many brand PIPs were put on hold. Have sellers adequately factored such realities in their asking prices?

Our goal should be an improved asset that is competitive in its marketplace. The strategic use of capital is important as well. Capitalization that “borrows” from realistic renovation and CapEx funds can be a major stumbling block to a successful investment and potentially guest satisfaction. Insights gained from the pandemic as we look to underwrite properties going forward include areas such as deployment of labor, new housekeeping regimes and their impact on wear and tear of properties, or revenue streams, food and beverage in particular.

Overall, in today’s complex marketplace, where the full impact of the pandemic is yet to be known and business and consumer patterns are in flux, if we are patient and prudent, excellent investment opportunities remain. We should look to be opportunistic, but also realistic, and take it steady as we go. It should be noted that pre-pandemic, according to the CBRE Research Americas Real Estate Market Outlook 2020, there was an abundance of capital to drive investment volumes approaching $500 billion in the years 2015 to 2019. The investment interest in the hospitality asset class remains strong today and could potentially increase from previous projections as non-deployed capital looks for value investment opportunities.

Rick Takach is chairman and CEO of Vesta Hospitality. Takach currently serves on the Board of Directors of the AHLA and Chairs the Management Council. He is also on the Board of the Oregon Restaurant and Lodging Association (ORLA).