With the tourism industry recovering from the pandemic, investing in hotels has become a hot topic. However, there are still risks and challenges in hotel investment that need full consideration. This article will analyze the return potential, risks, and other factors in hotel investment through in-depth research and data analysis. By systematically examining market trends, RevPAR changes, cap rates, property values, and financing conditions, investors can make informed decisions on whether investing in hotels right now is a worthwhile endeavor. With multiple occurrences of “investing in hotels right now” and “hotel investment”, this article provides comprehensive guidance for prospective hotel investors.
Hotel occupancy and ADR rebounding provide upside potential
The hotel industry was hit hard by the pandemic, with occupancy falling to historic lows in 2020. However, occupancy has rebounded significantly since vaccination rollouts. STR data shows US hotel occupancy recovering to nearly 60% in 2021. Meanwhile, room rates are also bouncing back. The revenue per available room (RevPAR) index has improved to over 90% of 2019 levels as of October 2022. With travel demand picking up steam into 2023, hotel revenues and profits are likely to continue improving. As such, hotel asset values that decreased during COVID have upside potential as performance metrics recover.
New hotel construction still limited, constraining supply growth
Despite improving fundamentals, new hotel construction starts remain well below pre-pandemic levels. Lending conditions are still tight, limiting developers’ ability to build. Furthermore, labor and material constraints have added cost pressures, making new hotel projects less feasible. Limited new supply amid rebounding demand bodes well for higher occupancy and room rates going forward. However, some locations may experience oversupply as travel patterns shift post-pandemic.
Caution warranted given economic uncertainty and inflation
While hotel demand has rebounded swiftly from 2020 lows, there are risks on the horizon. Spiking inflation and rising interest rates may curb discretionary travel spending, especially for higher-end hotels. A potential economic slowdown in 2023 could also hamper hotel investment returns. Investors must assess how vulnerable their target hotel properties are to macroeconomic fluctuations. Upside potential exists but uncertainties call for prudent underwriting.
Target stable, long-term cash flows with conservative capital stack
In today’s environment, hotel investors should target stable properties with proven demand drivers, minimal exposure to transient business travel, and low leverage. Favoring limited-service suburban hotels over volatile CBD assets can produce resilient cash flows to weather economic volatility. Maintaining ample liquidity and securing long-term, fixed-rate debt can also help manage risks. While hotel investment has upside, careful due diligence and risk mitigation strategies are essential in current conditions.
Hotel occupancy and rates show recovery momentum but economic risks remain, warranting cautious underwriting given inflation and supply dynamics. Upside potential exists long-term but investors must evaluate hotel asset cash flow stability and utilize conservative capital structures.