The hotel sector has been hard hit by the global pandemic, leaving borrowers and the owners of real estate assets in need of financing solutions. For investors, this has resulted in an opportunity to deploy capital at potentially attractive levels across the capital structure.
Hotels and retail properties have borne much of the global pandemic’s brunt since the spring of 2020 with COVID-19 ravaging the U.S. economy and dramatically altering consumer behaviors.
And while the challenges facing the retail sector are as much about structural change as they are about cyclical weakness, the story is notably different in the hotel sector, which remains underpinned by long-term structural growth drivers.
That doesn’t mean the picture for hotels has been a rosy one. In fact, as a result of the global pandemic, U.S. hotels saw their largest-ever decline in demand in 2020—with RevPAR (revenue per available room) down some 47.5% vs. 20191. And even this striking statistic doesn’t tell the full story, as it wasn’t until March 2020 that the virus started to truly weigh on demand in the U.S.
The impact has also been uneven. Upper-upscale hotels have been hit particularly hard—with year-over-year RevPAR down roughly 62%. The fall has been even more dramatic for properties in gateway urban cities with large exposures to international travel and/or convention business.
While there are some similarities to prior periods of crisis, the comparable impact following both September 11th (-10.4%) and the Global Financial Crisis (-16.8%) pale in comparison to what we have witnessed from COVID over the last year. Perhaps the most obvious drivers of this are the duration of the pandemic and its global nature, which have resulted in an unprecedented drop in travel of all types.
Where There is Crisis, There is Opportunity
Even with all of this doom and gloom, if we use past cycles as a guide, there will be opportunities emerging in the pandemic’s wake. Today, these opportunities are beginning to come into view.
The key to capitalizing on them will be to understand where the underlying structural trends that have been in place long before COVID will intersect with the coming cyclical recovery, which will inevitably be uneven across the hotel sector and tied to factors like location and property attributes.
1. Source: Smith Travel Research. As of December 2020.