Imagining the Hospitality and Hotel CRE recovery

One of the hardest pandemic-hit sectors in the last 12 months is travel and tourism, a space with significant overlap with commercial real estate (CRE). For those who trade in and invest in hotels and hospitality CRE, it has been a dark time – and sadly analysts aren’t promising a rapid bounce back. Rather, we are hearing estimates in the region of two to three years for a return to pre-Covid-19 levels – or longer, if major markets are affected by further “waves”.

Economic Impact

According to research by Northern Trust, tourism and travel are worth an estimated 10% of global GDP, and provides jobs for 330 million people. Forecasts from Oxford Economics and the United Nations World Tourism Organization (UNWTO) in 2020, predicted that international arrivals would drop by “over 70%, contributing to about 200 million job losses”.

That was their “worst case scenario” last year, but with multiple waves of this health crisis still being felt around the globe, the final impact is still to be assessed. 

Sector specifics

There are many things contributing to this, not least of all the correlation between travel and the spread of the coronavirus. Because this link was so immediately clear, international travel was all but shut down in 2020, and for many countries that remains the case with borders closed for anything other than essential travel.

As investors at Northern Trust explain, hotels are a “highly cyclical sector that experiences an overnight collapse in demand”. That speaks to the viability of tenants and operators in tough times, as well as the investment prospects that flow thereafter.

The acceptance for work-from-home will also keep more business travelers away and for longer, so areas that have economies built on conferencing and eventing are unlikely to see an uptick in business soon. Tourism recovery will, instead, start in cities that have clear pandemic-mitigation measures in place and those that can promise a safe “bubble” for tourists.

Looking forward for sustainability

On a more positive note, commentators have made the point that this is an opportunity to reset in many ways – shifting towards more sustainable tourism and hotel development practices. Deals with clear environmental, social and corporate governance (ESG) principles will sweeten the deal for investors.

Outliers and options

A handful of destinations are expected to buck the trend, with sharper tourism increases, and a swifter hospitality CRE recovery in conjunction. Parts of Australia, for example, are already seeing a shift towards new inventory.

Hotel shares movements also reflect optimism. As Million Acres reports, “As of March 19, 2021, Park Hotels and Resorts (NYSE: PK) was up 33.4% YTD, Pebblebrook Hotel Trust (NYSE: PEB) 35.4%, and Hersha Hospitality (NYSE: HT) up 47%”.

“That makes a good case for real estate investment trusts (REITs), says Steven Vazquez, NAI Global Capital Markets Hotel Expert, “and shows a willingness to buy in now as people think the bottom was reached and things looking up.”

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