Hotel Sector Still a Compelling Investment — With Risks

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Larry Antonatos

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Larry Antonatos, portfolio manager, Brookfield Asset Management.

The hotel sector is particularly interesting now as the reopening continues and more people begin to travel. There is good opportunity here, but hotel investing is not without risk. It is the most volatile of the real estate sectors, driven by the short lease duration. Hotels essentially are a collection of one night leases. Covid had an acute negative impact on the hotel sector.

Hotel revenues are frequently expressed as RevPAR, or revenue per available room, RevPAR, which is a function of average daily rate and occupancy. Relative to 2019, pre-Covid, U.S. RevPAR collapsed to -80% in April 2020. This was principally driven by a collapse in occupancy from 70% to 20%. As the reopening has progressed, U.S. RevPAR has steadily recovered, and as of December 21, relative to 2019, it is +4%.

However, there is still wide dispersion among markets and segments, creating significant opportunities for active management. Within the U.S., the top five best performing markets have RevPAR, revenue per available room, 10% above 2019 levels. These markets are generally characterized by leisure travel, warm weather, and drive-to destinations. For example, Miami, Phoenix, Tampa, and New Orleans. In contrast, the bottom five worst performing U.S. markets have RevPAR 37% below 2019 levels. These markets are characterized by business travel, convention travel, and international tourism. For example, San Francisco, Chicago, and Oahu, Hawaii. By segment, the extended stay segment, which focuses on stays of one week, one month, or longer has been particularly strong, while any segment focused on business travel, upper upscale, luxury has tended to be weak.

As Covid restrictions have loosened, we see acceleration of demand. There is what we would call pent-up demand for leisure travel. People who have been cautious are now finally getting back to traveling, and that will drive continued growth in these leisure markets. We’re very excited about that. Within the business and convention market, it may not necessarily be pent up demand that drives acceleration of RevPAR. We’re very much tied to the return to office. As return to office accelerates, we do expect a return to business travel for face-to-face meetings. One of the risks we face in this market is that the growth of virtual meetings will not immediately go away. There is value in face-to-face. There is value in convention. There is value in networking. But, we believe that the growth of virtual meetings may mean that business travel will take much longer to return to its previous levels of RevPAR than leisure travel.

Significant recovery is still to come within business, convention, and international tourism markets. We are particularly excited about hotel investments here. Hotels in these markets tend to be very high quality, and therefore attractive to institutional investors and international investors, which is supportive of long term value and long term liquidity. We are taking advantage of these opportunities, but are prudently managing our position sizes so that we generate attractive risk-adjusted returns, and limiting our downside due to this higher volatility sector. We are very excited about hotels, but again, are remaining prudent in our investments.