CHICAGO — Uncertainty and cautiousness plagued hotel investor interest in 2020 due to the COVID-19 pandemic, however, the global lodging industry is poised to rebound in 2021. According to JLL Hotels & Hospitality’s annual Hotel Investment Outlook, the industry’s resilience shaped new experiences and demand from consumers while introducing a wave of trends that have been accelerated as hoteliers quickly shifted operations and strategy.
In 2020, hotel liquidity was down more than 60 percent from 2019 levels, with nearly 50 percent of all transactions closing within the first three months of the year. Although challenging to navigate through a zero cash-flow environment, lenders were accommodating by granting forbearance agreements where possible.
Private equity groups and institutional investors took advantage of assets that were made available for sale and drove liquidity in 2020 by accounting for 54 percent of total volume. Approximately 21 percent of global hotel investments were in resort markets, signaling the current investment appeal of less dense markets. Resort investment interest is expected to be a catalyst in driving hotel investment volume upwards of 35 percent from 2020 levels.
The pandemic will undoubtedly have long-term implications on the industry; over the short-term, JLL Hotels & Hospitality expects the following trends:
Private Equity and HNWI Investment
Private equity groups and high-net-worth individuals (HNWI) will continue to be active investors of hotel assets in 2021, according to JLL Hotels & Hospitality’s Hotel Investment Outlook. In 2020, $24.5 billon in capital was raised in closed-end funds targeting hotel and hospitality assets globally, matching 2016 levels. Additionally, all regions globally are seeing a flurry of fundraising activity with opportunistic capital ready to mobilize on distressed assets, allowing non-traditonal investors to get a piece of the lodging pie at a competitive price. This trend is expected to drive the bulk of liquidity in 2021.
The “manchise” structure is on the rise as hotel parent brand companies evolve from traditional management agreements. Manchise refers to a brand management contract with the flexibility to be converted to a franchise agreement. JLL expects these types of agreements to grow in prominence as hotel parent companies expand their geographic footprint and owners demand more flexibility and accountability. Manchises can also potentially result in lower overall fees for a hotel owner, while also making hotel parent companies more competitive in the hotel management space.
Shifting Consumer Preferences
Consumer preferences will drive hotel room redesigns and the acceleration of technology advancements. Consumers slowly started to travel again during the pandemic, with noticeable preferences for larger, individual, and private accommodations to comfortably stay for longer periods of time and work productively, remotely. Because of this, extended-stay hotels and vacation/residential rental options outperformed the greater accommodations industry. Additionally, operators accelerated their technology advancements, as touchless/contactless service became a priority for consumers. Hotel amenities and room service, including food delivery, mobile reservations, and contactless check-ins, and the emergence of hybrid conferences for meetings and event planners, also took center stage.
Pressure to prioritize real estate investments grounded in ESG (environmental, social, and governance) principles at the global stage takes precedence. Globally, the commercial real estate sector has a notable role to play in promoting ESG principles and the lodging industry specifically has the opportunity to meaningfully accelerate change. Furthermore, the recent increased spotlight on issues of racial injustice has renewed the focus on advancing diversity and inclusion initiatives across all industries, particularly at the upper-management level. At the same time, consumers are becoming more aware of the values that guide how companies are conducting business and using their purchasing power to affect change.
Hotel assets must remain agile and adopt these changes as the global lodging industry continues to be tested in ways it never has, according to JLL. Additionally, traditional brands are being forced to reexamine their product offerings to remain competitive as consumer preferences evolve. The road to recovery will be long, but there is optimism that pent-up demand to reexperience the world will gradually boost hotel performance across most markets. Once recovered, hotels should look and feel much different than they did at the beginning of 2020.