To Stay or Not to Stay: How the COVID-19 Pandemic Is Changing Hotel Investment and Financing

Jan 12, 2021

This post was written by partner Terry Hess. Terry is a partner in the Atlanta area who has served companies from a variety of industries including Commercial Real Estate, Construction, Pharmaceutical, Manufacturing, and more. He is a CFO advisory expert who is passionate about writing on current trends in finance.

The Fight to Survive

Aside from the health consequences from COVID-19, several industries have experienced severe economic and financial hardships. The commercial real estate industry is one of them, with the hotel industry being one of the hardest hit subsectors.

In the United States, there are more than 54,200 hotels with over 5 million hotel rooms. Since the start of the pandemic, many hotels have seen monthly occupancy rates decrease by 30% to 80%, and average daily rates (ADR) decrease by 10% to 50%. This is largely due to the cessation of business travel, as well as the slowdown in leisure travel. While later during the pandemic, some full-service and resort hotels have experienced year-over-year increases in occupancy and ADR, these represent a small percentage of all hotels and are generally in desirable getaway destinations, which do not require significant travel and offer relatively unconfined indoor spaces with access to outdoor space and activities.

The dramatic and sustained decrease in occupancy and ADR has significantly affected hotel owners across the spectrum of individual owners, hotel REITs, institutional investors, and public and private investment companies. In a traditional recession, hotel owners and commercial real estate investors sharpen their pencils to underwrite and acquire hotels at better prices than they would be able to in a stronger market. However, this is not the case with the COVID-19 recession. Rather than investing, current hotel owners and investors are hoarding cash to manage the needs of their current portfolio. Asset managers have prepared to cull the weakest performing or lowest value assets to bolster cash and ownership stability of their more prized and higher potential assets.

The lack of investment capital from hotel owners and investors has led to a dearth of transactions; even the price discounts offered thus far have done little to increase trading. Unlike in previous recessions, lenders have offered significant relief, but they will not be able to offer endless relief, and at some point, owners and lenders will need to address and sort out recapitalization, changes in loan terms, and/or changes in ownership structures.

Luckily for lenders, many unlikely capital sources are entering the hotel space. Some see a longer-term investment opportunity with existing hotels, and some are waiting for lenders to begin repossession activities. In any event, these new sources of capital have led to recapitalizations with more lenders also participating in equity. The new capital is a welcome lifeline to the sector, albeit at a greater cost to ownership.

Nobody is certain how long the pandemic may last and what lies ahead, but like the rest of us, the sector has been doing its best to adjust. Eagerly awaiting the return of leisure and business travelers, the hotel investor and ownership community remain optimistic the sector will recover.

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