JLL’s 21st semi-annual Hotel Investment Sentiment Survey
JLL’s Hotel Investor Sentiment Survey provides a perspective on the current state of the lodging industry and highlights investor expectations related to investment activity and hotel performance.
The pandemic’s shock sparks resilience in the lodging industry
Historically the lodging industry has proved to be one of the most resilient industries in the world and there is no reason why the industry cannot recover from the COVID-19 shock. As one of the real estate sectors most dependent on individual mobility, travel restrictions and government-mandated lockdowns induced a dramatic decline in hotel occupancies across the world with performance hovering near 10% or even lower for the month of April. The onset of the pandemic not only caused hotel occupancies to plunge, but also led to a surge in unemployment across the industry. In the U.S., unemployment in the leisure and hospitality industry climbed to 40% for the month of April, the highest rate amongst all industries. The WTTC recently estimated that, in a worst-case scenario, the travel and tourism sector in the UK stands to lose nearly three million jobs.
Nevertheless, performance and employment figures are starting to improve, albeit at a sluggish pace. Year-to-date July occupancies for some of the top global gateway markets, such as New York, Melbourne and London, crept into 40% territory as more hotels started welcoming guests. While these figures offer some hope, the path ahead will still have some challenges.
How long before hotels bounce back?
When will revenue per available room (RevPAR) return to 2019 levels? This may be the million-dollar question, but a better question is: What is the RevPAR basis hoteliers should be striving to achieve in a different world? The idea of being comfortable operating under a new “normal,” was reiterated by our findings in the Hotel Investor Sentiment Survey (HISS) with nearly 40% of investors indicating that for investment activity to pick-up, occupancy will need to be within 60% to 70% of 2019 levels.
At the onset of the pandemic, prognosticator consensus suggested the industry would recover in two to three years, while most now expect the industry recovery to take slightly longer, with up to a four-year timeline. However, certain hotels are outperforming and may bounce back sooner. For example, extended-stay and economy hotels. For the week ending August 22 in the U.S., the economy hotel class saw demand recover to 91% of the average weekly demand observed in 2019. Further, as we continue to see the the number of COVID cases rise and different countries/markets emerge as hotspots, we realize that recovery timelines will also vary region by region. In fact, the HISS revealed that global investors expect their property/portfolio RevPAR to return to 2019 levels at a quicker pace across APAC (2.5 years), followed by EMEA (3 years) and lastly North America (3.7 years). These expectations are likely influenced by the number of COVID-19 cases per region.
The shift from acquisitions to loan restructurings and beyond
To support the lodging industry’s recovery efforts, global investors in the HISS indicated that lender support and government support on payroll responsibilities are the top two most impactful measures in providing relief to the industry. Indeed, we witnessed several governments step-up in unprecedented ways by implementing robust fiscal and monetary policies to lend support to hoteliers. But until a vaccine is widely available, the lodging industry’s performance will remain stagnant - additional aid in the form of stimulus packages will be necessary to bolster it.
During the second quarter of the year, hoteliers focused on asset management and lender outreach as they sought to negotiate forbearance periods. The shift away from hotel acquisitions was evident in H1 2020 global transaction volume, with activity falling 51% relative to the same period in 2019. With Q3 well underway, we anticipate another phase of loan restructuring and for activity to concentrate on rescue capital and note sales. This trend is supported by the HISS results, where investors indicated their appetite for hotel acquisitions has moderated. In fact, only 24% of respondants noted that they are active in the market, down from 40% pre-COVID-19. It’s expected investor sentiment will begin to shift toward deal sourcing in Q4 and into 2021 as the pipeline of hotels available for sale is revitalized and the opportunity to acquire assets at a significant discount to replacement costs becomes more pronounced.
By year-end 2019, $3.7 billion in closed-end private funds was raised globally in hotel-focused vehicles, representing a 35% compounded annual growth rate relative to 2015 levels. With record level of dry powder on hand, private equity firms are preparing to pounce on distressed assets that come to market, driving the bulk of liquidity as activity picks-up. Foreign investors are also expected to be providers of liquidity, particularly in the U.S., as a sharp drop in the cost of currency hedging is making U.S. real estate much more affordable. Notably, in the HISS, investors indicated that despite embracing a domestic-focused investment strategy over the next six months, Europe and North America remain top of mind for foreign hotel acquisitions.
A way forward
The pandemic accelerated certain trends in the industry and encouraged hotel operators to be more creative in attracting guests and diversifying revenue streams. Properties across the world have quickly adopted technology enabled check-in and check-out options to provide a contactless lodging experience. Moreover, hotels are offering quarantine packages to individuals who need to isolate, have planned a staycation or are working from home indefinitely. In Bangkok, the Mövenpick BDMS Wellness Resort is offering a package that includes accommodations, three meals a day and an initial consultation with a doctor. In Brooklyn, New York, The William Vale hotel is offering the, “Q with a View,” package. The package includes private transfer from the airport to the hotel, a room with a balcony, contactless housekeeping services and virtual workout classes that can be done in the room.
The truth is that the global lodging industry will continue to be tested in ways it never has. The industry is resilient and has overcome previous shocks. Hoteliers everywhere are strategically reopening properties and curating safe and thoughtful experiences for all guests. Despite the ongoing uncertainty in the industry, there is optimism that pent up demand to re-experience the world will gradually boost hotel performance across most markets.
JLL’s 21st semi-annual Hotel Investment Sentiment Survey offers unique insights and perspectives on future investment trends. The survey was sent to over 1,000 global clients in June 2020.