H&LA’s Adam Zarczynski attended the Hunter Hotel Investment Conference in Atlanta in March. Here are some key highlights from the conference.
Our team at Cogwheel Marketing attended the 2023 annual Hunter Hotel Investment Conference for a consecutive year and we wanted to be sure to share with our network the 10 Key Takeaways we extracted after packing in 3 days of education, collaboration and relationship building with hotel industry experts.
Another exceptional Hunter Conference is in the rearview mirror, with much thanks to Lee Hunter and his team, as well as the Atlanta Marriott Marquis, for pulling off a terrific event. Never a dull moment in the hotel industry, which is why many of us never leave the sector, with attendees having such varied opinions on how this year may play out.
When I began investing in real estate, I focused on single-family rentals because I did not know that I could actually buy a commercial building with my level of income and savings.
It’s a difficult lending environment across the nation at the moment, but RevPAR is expected to continue to rise in the foreseeable future, particularly supported by ADR growth. Debt, while very expensive, is available, and one lesson learned from the pandemic is the importance of sponsorship, including relationships with the brands.Below is the SWOT analysis for the U.S. hotel real estate and investment industry as outlined at the GF Hotels Forum in Towson, Maryland.
Hotels are a vital part of New York City’s economy, accounting for approximately $13 billion of revenue per year. In recent years, however, the City Planning Commission has adopted certain amendments to New York City’s Zoning Resolution in an attempt to curtail hotel development. These changes have been top-of-mind for owners and developers involved in the New York City hotel real estate market.
Nicknamed “the Magic City,” Miami has maintained its position as a world-class destination despite the national economic challenges experienced since 2020. At the height of the pandemic, Miami’s favorable weather and relaxed restrictions attracted new residents and businesses from all corners of the country and the world. In the post-pandemic era, the greater Miami area remains a top U.S. market. In 2022, hotels in this market realized year-over-year growth in all metrics across each submarket. Furthermore, new hotel supply continues to be added, with numerous recently opened hotels and countless proposed developments.
High interest rates and a recession will make 2023 a challenging year for commercial real estate. Though inflation eased in late 2022, it was still running at more than 7%. The Fed will continue raising rates until it sees a marked reduction in inflation nearer to its 2% target. Weakening fundamentals and higher cost of capital will generally lower asset values.
According to data compiled by STR, in recent years, the luxury segment has fallen 2–5% behind the Washington, D.C. market average in occupancy, while luxury rates have paced roughly $150 to $200 above average. This rate difference is largely due to a few luxury hotels that perform at a higher rate threshold than the remainder of the luxury class, including the Four Seasons, the Waldorf Astoria, both Ritz-Carlton properties, the Hay Adams, and the St. Regis. These higher-rated hotels make up 15% of the total luxury room supply in the District.The 2022 market-wide operating performance for District of Columbia hotels was roughly 62%, at an ADR of just above $240. The 2022 RevPAR falls more than $20 below the 2019 level. The luxury hotel segment, which comprises around 30 hotels, also did not fully rebound to the historical 2019 RevPAR levels in 2022. However, ADR for this segment grew to roughly 115% of the 2019 level.
In light of the tumultuous global challenges which have dramatically affected the hospitality industry, now more than ever we need to fully understand the reality of developing properties in international contexts. For owners, developers, investors, managers and other professionals involved in hotel development and investment, the operating environment has shifted to such a degree that as we begin 2023 we need to consider how to respond to the latest challenges. For every challenge, however, there is opportunity. Here are six opportunities for global hotel development projects.
The hotel sector, until the past few decades, had been largely unchanged for hundreds, if not thousands of years. But the growth of models that have allowed operations to be split away from ownership has caused a shift in the industry that is still playing out.
Before March 2020, hotel operations varied hugely. The sector was on a high. STR reported a record year in 2019 and, although costs and supply were both rising, it seemed that a cyclical dip was being pushed ever farther back, and the good times could continue indefinitely.
Heading into a new year, the U.S. commercial real estate industry finds itself in choppy waters amid fears of a recession, rising inflation, and interest rate hikes as market participants await a course correction. Challenges during 2022 including continued supply chain constraints, increasing labor costs and struggles in attracting talent are anticipated to endure through 2023. Combined with international and domestic geopolitical issues and market volatility, many believe during the near term, the U.S will experience a mild to moderate economic recession.
Luxury hotel demand staged a respectable resurgence last year as the dreadful impact of the pandemic continued to fade. Trailing twelve-month RevPAR for luxury hotels in NYC, as of November 2022, has already surpassed its pre-pandemic benchmark from December 2018. This was a welcome improvement for prominent Midtown hotels that had reopened after many months of closure, including the Mandarin Oriental, Ritz-Carlton, The Plaza, St. Regis, The Peninsula, and the Lotte New York Palace.
While the construction of hotels and resorts is still progressing at a fast pace, new trends are appearing with the ever stronger need for innovation initiated by guests.
The capital markets have experienced a signficant shift in the past six months, and financing for hotel projects is both less available and more expensive than it was in the first half of 2022. Driven by successive increases in the federal funds rate, interest rates have risen and are now typically in the 6% to 8% range, depending on the asset and market. At the same time, concerns related to a potential recession and the impact of inflation on operating costs and consumer spending have induced a layer of caution about the near-term outlook for the industry. As a result, loan-to-value ratios have declined and amortization periods shortened, reflecting the market’s perception of elevated risk in the near term. These factors have combined to make current mortgage capital relatively expensive compared to both recent levels and long-term norms.
Economists, politicians, and business leaders are split on whether the U.S. economy is heading for a recession, is already in one, or will merely experience a slowdown. With continued supply chain disruptions, geopolitical conflicts (most notably the war in Ukraine), and the Fed’s determination to continue increasing the federal funds interest rate, there is tremendous uncertainty around inflation and where the economy is heading. Mixed signals abound, however U.S. gross domestic product (GDP) increased for the first time this year in the third quarter, expanding at a higher-than-expected 2.6 percent annually. Unemployment remains low, wage increases are strong and while growth and earnings are slowing, most consumers and corporations are in good financial condition with healthy underlying credit.
The hotel industry is highly complex in nature and is extremely sensitive to economic and market dynamics. Just as the industry was emerging from the pandemic's shadow, new challenges have emerged, including rising input costs and other inflationary pressures, a bleak outlook for the global economy due to the possibility of a recession in the US and Europe, along with longstanding issues like a labor shortage. As a result, many hotel owners who are struggling to run and manage their properties are finally realizing the importance of working with professional asset managers to review and improve their hotel’s performance.
The deal activity in the global travel and tourism industry has been improving, with 573 deals (including M&A, private equity, and venture financing) being announced during the first half of 2022, up 3.1% over the same period in 2021. However, deal activity in India continues to be lackluster, as the industry has also not yet witnessed a flurry of distressed transactions in the fallout of COVID. Nonetheless, there are several hotel assets for sale in the market and HVS currently has over a dozen buy-side, sell-side, and capital restructuring mandates.
Any optimism for a post-COVID resurgence of hotel lending activity has evaporated as the market stalls in the face of the highest interest rate environment in over a decade. The surging economic uncertainty is undoubtedly impacting the level of angst many hotel owners are feeling at the moment. The magnitude and unpredictability of changing loan underwriting assumptions in the past sixty to ninety days alone have meaningfully increased investment risk.