Do you remember the ghost town scenario that many hotels saw in the height of the COVID-19 pandemic? Most people who could avoid travel canceled trips, postponed meetings, and generally shied away from hotels.
As a result, the hospitality industry experienced sudden and drastic drops in occupancy, leading many hotels to close up shop either temporarily or permanently.
Savvy hotel owners and operators pivoted quickly during this time, offering things like contactless check-in, enhanced cleaning protocols, and more – all in an effort to help guests feel safe.
In the months and years since the height of the shutdown, travel has rebounded in a big way, and we are seeing tremendous opportunity in the hotel sector, particularly for midscale and upper midscale hotel chains targeting business travelers (think Homewood Suites, Hampton Inn, Holiday Inn Express, etc.)
In this article, we’ll share with you our outlook for the hotel sector in 2023 and beyond, the types of hotel assets we are pursuing, and much more.
Hotel Sector Recovery Post COVID-19
The hospitality industry experienced one its worst years on record in 2020. The COVID-19 pandemic brought travel to a standstill near the end of the first quarter of that year. Many hotels either closed temporarily or sold only a few nights.
Since that trough, hospitality has recovered to exceed 2019 performance. The pandemic led to a significant decrease in travel in 2020, which has created pent-up demand for travel and vacations in the months and years since then.
A Surge In Demand For Hotel Stays
As restrictions continue to ease and people feel more comfortable traveling, we have and continue to see a surge in demand for hotel stays, which has resulted in higher occupancy rates and a huge opportunity to invest in strong cash-flowing hotel assets.
When we analyze potential new hotel acquisitions, one thing we always examine closely is the performance of the asset during 2020, in order to stress the cash flows and assess the true strength of the asset.
Business Travel Is Rebounding
Although business travel was significantly reduced during the pandemic due to remote work and virtual meetings, it is now starting to rebound.
Many companies have resumed in-person meetings and conferences, which has led to an increase in demand for hotel rooms. Hotels have had to adapt to the new realities of the pandemic, such as implementing enhanced cleaning protocols and implementing new technologies for contactless check-ins and payments.
These adaptations have made hotels safer and more attractive to travelers, which has helped to drive the recovery of the hotel sector. This has also led to optimized management of hotel properties, as most franchises no longer require daily housekeeping, which has lowered the operating costs and thus boosted the bottom line.
Solid Hotel Sector Outlook – 2023 & Beyond
With the dire circumstances of the COVID-19 shutdown largely behind us, the rebound in both business and leisure travel has been strong, thus leading to a bright outlook for the hotel sector as we look to the months and years ahead.
Projected Increases In Revenue Per Available Room (RevPAR)
CBRE’s Q4 2022 Hotel Horizons report predicts a 5.8% increase in rooms revenue per available room (RevPAR) in 2023, despite concerns of sustained inflation and a moderate economic downturn.
This forecast is an improvement from the previous estimate of a 5.6% increase in RevPAR. CBRE’s upgraded projection is mainly driven by an anticipated 4.2% surge in average daily rate (ADR), which is partially due to the continuation of inflation above the long-term average.
The Impact Of Inflation On The Hotel Sector
CBRE expects the Consumer Price Index in the U.S. to rise by 3.5% year-over-year in 2023, and while inflation has both positive and negative effects on the hotel sector, it is likely to increase top-line growth while putting pressure on margins.
The hotel industry is experiencing the impact of inflation on development activity. The rising costs of construction materials, along with a tight labor market and high interest rates, are expected to reduce supply growth by 40% over the next five years compared to historical trends.
As a result, the focus of cash flows in the near term is likely to shift towards debt reduction, renovations, and remodels, due to the backlog of capital expenditures created during the pandemic.
Strong Demand For Hotels
Due to the strong rebound from COVID-19 and the positive outlook for travel in the months and years ahead, demand for hotels is strong.
CBRE has lowered its demand growth forecast from 3.3% in August 2022 to 2.9% in November 2022 due to its projection of a 0.2% decline in 2023 gross domestic product (GDP).
However, this demand is still significantly higher than the projected supply increase of 1.2% for 2023, meaning that demand will outpace supply.
That being said, the reduction in occupancy growth forecast for the year is estimated to be 1.6%, down from the previously predicted 2.0%, thus partially offsetting the positive outlook for ADR (average daily rate) growth.
Hotels In Strong Transit-Oriented Locations
You know what they say – location, location, location. Real estate is hyperlocal, and the hotel industry is no different.
As we look to potential hotel acquisitions, we are targeting transit-oriented locations for investment. A hotel located near transportation corridors will be more visible and accessible to potential guests, which can increase the likelihood of bookings and occupancy rates.
Guests who are traveling via these transportation corridors may be more likely to choose a hotel that is conveniently located near their point of arrival or departure. Areas surrounding transportation corridors often have a developed infrastructure, including restaurants, shopping centers, and other amenities that can attract guests.
A hotel located in such an area can offer its guests a range of nearby services and attractions, which can help to increase guest satisfaction and generate repeat business.
Further, transportation corridors are often subject to ongoing development and expansion, which can increase the value of nearby properties over time. This can provide investors with an opportunity to benefit from capital appreciation and potentially sell the property at a higher value in the future.
Many business travelers prefer to stay in hotels that are located near transportation corridors for convenience and ease of access. A hotel located near a transportation corridor can benefit from this demand for business travel and can potentially generate higher room rates and revenue.
Hotels That Target Business Travelers
When looking at potential hotel acquisitions, a big part of our strategy is thinking through and analyzing seasonality, to ensure any hotel assets we acquire maintain strong occupancy year-round.
Business travel is often less seasonal than vacation or leisure travel, meaning that hotels that cater to business travelers may be able to maintain higher occupancy rates year-round.
This can provide a more reliable income stream for investors. On top of that, business travelers are often less price-sensitive than vacation travelers, which can lead to higher room rates and revenue per available room (RevPAR). This can result in higher profitability for the hotel and potentially higher returns for investors.
Overall, the demand for business travel is generally more stable than vacation travel, which can provide greater stability for the hotel’s revenue and profitability over time. This can make the investment less risky and more predictable.
Further, business travelers often travel to the same destinations on a regular basis, which can result in repeat business for hotels that cater to this market. This can help to build a loyal customer base and increase the hotel’s occupancy rates and revenue.
Hotels that primarily cater to business travelers may require fewer capital expenditures than those that cater to vacation travelers. For example, business travelers may not require the same level of recreational amenities, such as swimming pools or spas, which can reduce the hotel’s operating costs.
Case Study – Goodegg Hotel Portfolio – Munster, Indiana
Through Goodegg Diversification Fund II, we acquired a portfolio of two select-service hotels in 2022, and the results have been fantastic for our investors.
Homewood Suites and Hampton Inn & Suites in Munster, Indiana, were the target of our acquisition efforts. Munster is conveniently located at the first exit when entering Indiana from Chicago and is only a short distance from downtown Chicago, thus providing a strong transit-oriented location.
Furthermore, these hotel assets are fully stabilized and offered the potential for high cash on cash returns and portfolio diversification. In fact, the average realized investor distribution for this hotel portfolio in 2022 was 11.33%.
The room revenue, average daily rate, and gross operating profit for both hotels in this portfolio is up significantly year-over-year, and we anticipate that strong performance to continue.
Our strategy is to hold the properties for approximately 5 years, while making improvements to optimize their performance. These two deals are a great base case that shows what kind of assets we will look to purchase as we acquire additional hotel assets.
Investing In Hotels
In closing, if you are considering investing in hotels, now can be a great time to do so, particularly if you focus on hotels that…
- Maintain strong occupancy year-round (for example, those targeting business rather than leisure travelers)
- Generate strong cash-flow as-is, with further opportunities for adding value, improving the property, and maximizing operational efficiencies
- Are midscale and upper midscale hotel assets, rather than upscale or luxury
- Are located in key strategic transit-oriented locations, particularly in areas geared toward business travelers
Here at Goodegg Investments, we have a variety of options for you to help you learn about and invest in real estate – a great hedge against inflation and rising interest rates.
Through real estate syndications, you can diversify your portfolio and take advantage of the cash flow, equity, appreciation, and tax benefits.
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