- Emily Goldfischer
NYU 44th Annual Hotel Investment Conference: 5 Takeaways from JLL's Stephany Chen and Zach Demuth
The annual NYU Hotel Investment Conference is one of the key meetings of the year for those on the real estate end of the business. We turned to the team at JLL Hotels & Hospitality to get 5 key takeaways from the event.
Zach Demuth, Head of U.S. Hotels Research, and Stephany Chen, Executive Vice President, Global Hotel Desk, reported that the conference was buzzing and well attended. Overall, top trends:
Lodging fundamentals continue to improve as hotels across the country begin to not only reach peak RevPAR levels, but some have even far surpassed 2019 ADRs. Improvement is anticipated to continue, particularly, in the group segment and as business travel comes back even more prevalently.
A disconnect between lodging fundamentals and the capital markets (ie. debt and the ability to secure financing). Although investors are cautious about where the debt markets will be in the near-to-medium term, many have agreed that there is still available debt out there and deals are still getting done, albeit, taking a bit longer.
Refocus on urban markets. Although resort markets remain extremely strong and of interest among investors, groups are also now looking harder at cities given the strength and rebound of business travel.
"Sentiment remains optimistic for the lodging industry given the strength of the fundamentals but there remains a cautious outlook on the capital markets over the near to medium term," says Stephany. Here are the 5 key takeaways:
1. ESG has risen to the top of the agenda.
The tenants of ESG (Environmental, Social, Governance) must be embraced by all constituents in the lodging sector: guests, employees, operators, brands, and owners. ESG should be an area of collaboration for the industry, not a source of competition.
Areas of focus: reduction of hotel food waste, increased diversity amongst hotel leaders, and better access to capital for women and minorities.
Each aspect of ESG can be a key differentiator in attracting talent and therefore is crucially important given the ongoing labor shortage across the industry.
While ESG (namely sustainability) has not yet translated into a cost of capital advantage in the U.S (i.e. they are not getting more favorable terms like lower interest rates or better financing terms); however, these types of assets typically receive more bids as investors are starting to recognize the benefits to sustainably-focused hotels (better operating margins and generally higher asset values).
2. Hotel economy is decoupled from macro economy.
Unlike the macro-U.S. economy, which is experiencing slowed spending due to rising inflation, travel spending is accelerating and will reach all-time highs this Summer
While travel was decimated during COVID, many other industries had record years
With a potential economic recession on the horizon, there is reason to believe that there would be a limited impact on the lodging industry:
Hotels remain the greatest inflation hedge due to their ability adjust selling rates on a nightly basis.
The societal paradigm shifts all benefit the travel industry: rising wages for the middle class, more people retiring younger, and increased work flexibility.
3. Rising debt costs are top of mind for some, but hotels remain a very attractive sector for real estate investment.
The debt market has been unusually volatile. Unlike prior cycles, debt availability remains abundant. This, combined with record levels of interest in hotel investment and accelerating fundamental performance, should continue to drive transaction activity.
Expect portfolio transactions to drive volume as debt costs rise: scale + access to more capital will help to defray other costs amidst economic volatility.
Hotels remain the most attractive sector amongst rising interest rates. Unlike other commercial real estate classes (office, industrial, retail, etc.), hotels can adjust their selling rates on a nightly basis thereby giving them a competitive advantage to cover rising costs (interest rates, inflation, etc.). Most other commercial real estate classes have long leases; therefore, their rates (e.g. rent) is fixed over a long period of time.
Some investors are increasing equity in deals with the expectation that rate will fall in the next 2-3 years, and they can refinance at all-in lower costs.
4. Travel demand continues to accelerate. Hotels have pricing power and will see continued rate growth.
Summer 2022 is likely to be the best in U.S. history from a hotel demand perspective
Accelerating demand, coupled with all-time highs in U.S. savings, will create tremendous pricing power which should result in continued ADR growth.
Leisure, Bleisure, and the reemergence of group travel will be the key demand drivers.
Expect a boom in travel for urban markets, particularly those with tourist attractions that cater to leisure customers.
5. Prolonged deferred Capex (Capital Expenditure) is front and center as supply chain disruptions and inflation are making renovations more costly. Hotels that renovated during COVID are more attractive to investors.
Despite improving profitability, property investments remain extremely limited as many hotels depleted their FF&E reserves during COVID to make payroll.
As room rates continue to grow, customers are reaching the limits of forgiveness. Brands have started reinstituting PIP (Property Improvement Plans); however, supply chain disruptions and rising construction costs have delayed many projects.
Those hotels that have been able to renovate have seen significant increases in operating performance and likely will attract more investor interest at higher values.