Hospitality CRE: 30 Years Later

The face of the hospitality industry has changed radically in 30 years, and in just the past three months has faced one of its hardest challenges yet—surviving a global pandemic. In this overview, let’s first take a look at the evolution of this sector over the last three decades before discussing how COVID-19 has changed everything we thought we knew.

In major cities all over the world, convention centers and subsequent hotels have only gotten bigger and bigger. Consolidation is rampant, and major hotel brands like Choice Hotels International, Wyndham Worldwide, Hilton, and Marriott, are leading the pack.

Hotels typically fall into five major categories, as described by Cadre.com: “Full Service, Select  Service, Limited Service, Extended Stay, and Budget.” The amenities and services vary for each category, distinguishing them and helping to define their brand identities. As an overview:

• Full Service hotels typically offer top tier luxury services—such as world-class spas, retail sites and five star restaurants—and are synonymous with upscale brands such as Four Seasons and St. Regis, sometimes even including midscale brands like Hilton, Marriot, and Wyndham hotels.
• Select Service hotels offer downscaled services to their full service counterparts, economized restaurants, as well as retail and meeting facilities. They are often in between full service and limited service hotels. Chains such as Hilton Garden Inn and Courtyard Marriott can be categorized here.
• Limited Service hotels are your more budget friendly hotels that still offer some select service options and amenities, such as meeting rooms and pools. They are often smaller and include Fairfield Inn, Comfort Inn, or Hampton Inns.
• Extended Stay, as the name suggests, offer more longer-term solutions for temporary hotel rooms, such as longer business travel or families in need of larger space or extenuating circumstances. Often these are suites with kitchens and provide discounts on longer stays. Residence Inn, Homewood Suites, or Embassy Suites are examples of Extended Stay hotels.
• Budget hotels, unsurprisingly, are available for lower costs and therefore have fewer amenities and services.

Visit Cadre.com to see more detailed descriptions of each.

Each of these categories cater to specific audiences and succeed in their lanes; at least they were, before COVID. Pre-pandemic, occupancy rates were high in the booming 2020 economy, averaging a solid mid-60%. Not to be ignored, however, is the impact of AirBnB and Vrbo. Lobbyists have been working hard to quash the upstart disrupters and subject them to the same regulations as hotel chains. Additionally, big investments by the major chains in new brands designed to be chic, less stodgy, and attractive to the next generation of guests show the pressure felt by the iconic brands.

Heading into July 2020, the impact of the pandemic on the hospitality industry has been devastating. From the lofty position of achieving record-high occupancy rates, hotels worldwide have been virtually empty as social distancing measures have stopped unnecessary travel in its tracks. American Hotel and Lodging Association (AHLA) cites the following grim statistics.

• Since mid-February, U.S. hotels have lost $36 billion in room revenue;
• Hotels are on pace to lose $400 million per day nation-wide;
• In mid-June hotel revenues were 34% of what they were in 2019 (per STR/Costar);
• In April 2020, 7.7 million hospitality and leisure jobs were lost;
• 70% of hotel employees laid off or furloughed with $2.4 billion in income lost per week;
• Hotel operators—big and small—are operating at 20% occupancy; and,
• Many below 35% occupancy, some 33,000 small businesses, may go bankrupt.

Convention and visitor bureaus all over the nation are running out of money. Sporting events, entertainment events, and conventions are all canceled, all of which are major sources of room demand in hotels. The AHLA released an Oxford Economics report saying that state and local revenue from hotel room taxes are estimated to drop by $16.8 billion in 2020, an impact that will linger for years to come.

So, the hospitality industry is no different than other asset classes in that the ultimate value of property is a function of a multiple of the net operating income. So how in the world do you value an asset whose future is so incredibly uncertain in mid-2020?

Cushman and Wakefield has an analysis that breaks it down into five possible scenarios (you can view them here)

They began the analysis from the perspective of January 2020. At this point there was no impact of a pandemic in sight and performance would be very similar to 2019, with a modest dip in NOI and a 5-year projection with about 30% NOI each—used as a baseline.

Their first comparative model shows “that the market and the property will begin to recover in early 2021.” Scenario two is then modeled to show a rebound to the hotel’s 2019 average daily rate with a five-year recovery. The third scenario is more optimistic, with a four-year full recovery. The final model shows hotels closing for 3-1/2 months of 2020 with a five-year recovery to 2019 levels.

While not a proper valuation technique, a rough approximation of the loss of value overall for the hospitality industry properties as an asset can mirror the losses in operating income. So, for example, as the NOI for 2019 was about 31%, and for the next five years would be 4.1%, 16.4%, 19.9%, 25.1% and 28.9%, one can easily see that—at least numerically—the loss in values is staggering, especially in the beginning.

To conclude on the value impact of the hospitality industry: billions of dollars, on paper, at least has been lost in value, and the impact will linger for many years.