Hotels were hit harder than any other type of real estate in the early months of the pandemic. Now, investors apparently can’t get enough.
More than $12.5 billion worth of hotels were sold in the first three months of 2022, according to CoStar Group,
the highest Q1 figure since 2016. Prices for hotels for sale are rising and the share of hotel mortgages in arrears recently fell to a new pandemic low.
Many investors, overwhelmed with cash but struggling to find things to buy, consider hotels cheaper than stocks or bonds. They are also betting that hotels will have an easier time recovering from the pandemic than offices or malls, which are struggling with a surge in vacancies that can take years to fill.
Although hotels face rising labor costs, they are among the types of establishments most able to adapt to inflation, as they can reprice room rates every day. This is especially true for limited-service or extended-stay hotels, which have smaller staff.
Hotel values rose 18% in March from a year earlier, according to Real Capital Analytics. Property prices have risen much faster than hotel profits, signaling that investors are optimistic about future travel demand.
Hotels aimed at vacationers are in high demand, especially in the Sunbelt, said Mark Schoenholtz, co-head of accommodations at brokerage Newmark. Rising wages and savings have allowed more Americans to splurge on trips.
This has boosted hotel revenues in cities like Miami; Orlando, Florida; and Nashville, Tennessee, attracting investors. Xenia Hotels & Resorts Inc..
last month paid $329 million for the W Nashville hotel, which was the most expensive hotel sale in the city’s history at $950,000 a room, according to CoStar.
Still, business travel is well below pre-pandemic levels as more Americans become accustomed to virtual meetings. This hurt hotels in cities like New York and Chicago. Hotel owners in New York also face competition from new construction. U.S. hotels are on average much less profitable than before the pandemic, according to STR, a hotel data and analytics firm.
Economic turmoil could delay the recovery. Rising prices and mortgage rates could leave Americans with less money to spend on travel, said Jim Costello, chief economist at MSCI Real Estate.
Rising interest rates will also make hotels less attractive to investors, driving down property values. Cheap debt was a major reason investors were willing to pay higher prices for hotels over the past year. Higher bond yields can also make hotels less attractive in comparison, reducing investor demand.
Some hoteliers are looking for new sources of demand to fill business traveler losses. CitizenM Hotels, for example, wants to attract freelancers, long-distance commuters and remote workers who regularly visit their headquarters and need a place to stay. The company recently launched a membership that guarantees customers a room for one night per month, said Chief Growth Officer Ernest Lee. He is also looking to add more office and meeting space.
Write to Konrad Putzier at [email protected]
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Appeared in the print edition of April 20, 2022 under the title “Investors Return to Hotel Market”.