There’s little doubt that the hotel industry took a beating during the COVID-19 pandemic. Social distancing measures and concerns over viral spread impacted travel and leisure well through 2021.
But a recent article in the Wall Street Journal sounded a highly positive note, pointing out that from an investor standpoint, buyers can’t seem to get enough of this property type. The article reported that $12.5 billion worth of hotels traded hands during Q1 2022, representing the highest first-quarter figure since 2016. “The prices of hotels for sale are surging and the share of delinquent hotel mortgages recent fell to a new pandemic low,” the article said.
The reason for the apparent interest? Investors are gambling that hotels will recover from the pandemic more quickly than will offices or malls, while hotels “are among the property types most able to adjust for inflation,” as they are in a position to reprice room rates, noted the WSJ. Leisure demand is also on the rise, pushing up room rates and, in turn, drawing investors.
Yet the actual scenario is a mixed bag. A report released by the American Hotel & Lodging Association indicated that 2022 hotel business travel revenue is anticipated to be 23% below the pre-pandemic levels. Certainly, leisure travel is on track to claw back to pre-pandemic levels, but business travel is anticipated to take longer to recover. As a result, while the hotel industry continues to move toward recovery, “full recovery is still several years away.”
CBRE’s “U.S. Hotels State of the Union” report for March 2022 echoes some of these concerns, indicating that continued interest rate increases from the Federal Reserve, along with continued supply chain difficulties and rising inflation could put a crimp in hotel profit margins, despite higher average daily rates (ADR). While occupancy levels, RevPAR and ADR did improve in March, the numbers varied, based on geography. Noted CBRE analysts: “East Coast markets are rebounding. Asia-dependent West Coast markets have not.”
Still, the news isn’t 100% grim. An Oxford Economics analysis on behalf of the AHLA predicts that hotel room night demand and revenue should be close to 2019 levels in the coming year, with room revenues projected to reach $168 billion, a 19% increase over 2021’s numbers. Occupancy is slated to hit 63.4%. This is close to the 66% reported in 2019, and well above the 44% and 57.6% in 2020 and 2021, respectively.
Even so, the AHLA indicated that challenges remain, one of which is that only a little more than half of meetings activities and other events are projected to return in 2022. Furthermore, hotels are likely to continue struggling with staffing shortages and inflationary pressures, both the CBRE and AHLA reports noted. And after its positive intro paragraphs, the Wall Street Journal sounded a concern about rising interest rates and its impact on hotel purchases.
“Cheap debt was a big reason why investors were willing to pay higher prices for hotels over the past year,” the article explained, adding that higher bond yields could also make hotels a less-attractive investment.
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