After a turbulent 2020, the hotel industry saw a year of false starts and uncertainty in 2021 amid new COVID-19 variants and restrictions. This year, an acceleration into recovery is expected when examining hotel-investment opportunities in the current market, despite ongoing labour shortages, supply-chain issues and inflationary pressures. Not only are investors ready to make use of aggressive acquisition strategies but consumers are also willing to pay higher rates to satisfy their itch to travel.
“The last two years have been a challenge with the ebb and flow of government lockdowns and lack of clarity on a path to recovery,” says Thomas Jacob, vice-president, Operations, K2 Group, an independent investment company. “We are, however, seeing signs of improvement and our performance indicators are already trending higher than 2021.”
Not surprisingly, global investment dried up in the wake of COVID-19, but the upward trajectory of investment in 2021 is likely to continue throughout 2022 and into 2023.
In 2021, global transaction volume totalled $66.8 billion, up 131 per cent from 2020, according to Jones Lang LaSalle’s (JLL) Global Hotel Investment Outlook report. The Americas was the most liquid region and accounted for nearly 60 per cent of global hotel-transaction volume, reaching $38.6 billion in hotel sales. Some noteworthy transactions include the Four Seasons Resort Orlando (USD$610 million), the Belmond Charleston Place Hotel (roughly USD$500 million) and Naples Beach Hotel & Golf Club (USD$362 million). Investor interest in this region is motivated by increasing vaccination rates, loosening COVID-19 restrictions and strong demand for domestic travel.
Europe, the Middle East and Africa (EMEA) was the second most liquid region and accounted for nearly 30 per cent of global hotel-transaction volume, reaching $19.7 billion in hotel sales, up 60 per cent over 2020 volume but still 35 per cent below 2019 levels.
Lastly, transaction volume in Asia Pacific was $8.5 billion, accounting for 13 per cent of total global hotel-transaction volume. This activity represented an increase of 39 per cent over 2020 volume, however, sales remained 40-per-cent below 2019 levels.
Across all regions, investors focused on acquiring luxury or resort assets with strong domestic or leisure demand. This trend is expected to accelerate even further in 2022, with global transaction volume predicted to increase between 35 and 40 per cent from 2021 levels. Moreover, the industry’s enhanced commitment to sustainable operations and practices offers unique opportunities for investment groups worldwide, leading to higher asset values.
“With rising inflation, interest rates and supply-chain issues, the road to a full recovery will likely be longer than we hoped for, however, we are optimistic,” says Jacob. “We have already begun looking at various asset classes, with a focus on upper mid-scale and resort assets especially in the U.S. market.”
Conversely, Mark Sparrow, executive vice-president, Hotels, CBRE, says foreign investors have their eyes on Canadian hotel-investment opportunities. “Once the borders re-open fully and regular activity resumes across U.S. and Canada, we’ll see more interest from U.S. groups. Currently, we’re dealing with a number of foreign investors looking at the Canadian hotel space with a strong degree of interest and a strong amount of capital for 2022.”
Overall, research from the World Travel and Tourism Council (WTTC) predicts the travel-and-tourism industry’s contribution to the global economy could reach $8.6 trillion this year, just 6.4 per cent behind pre-pandemic levels.
In the Canadian hotel-investment landscape, Sparrow notes that many hotel investors re-entered the space in Q4 2021 and, this year, the same trend will apply. There are a number of limited- service and full-service assets on the market that CBRE anticipates will close in Q1 or Q2 2022.
“K2 Group made 11 acquisitions in the past year and we have a robust deal pipeline currently undergoing due diligence and planning for 2022/23 closings,” says Jacob.
Canada can expect continued demand for resort and recreation trips across the country in markets such as Tofino, B.C., Whistler, B.C., Banff, Alta. and Quebec City, all of which will likely be the first to recover. In terms of performance metrics, Nicole Nguyen, director with CBRE Hotels Valuation & Advisory Services, predicts considerable growth in Average Daily Rate (ADR) this year and roughly a 43-per-cent uptick in Revenue Per Available Room (RevPAR).
“It would push national RevPAR above $80, which is still a ways from 2019 at $106, so we still have a gap to close, but certainly $80 from an industry-health perspective is easier to manage than $40 or $50,” says Nguyen.
Furthermore, Sparrow says one of the primary trends to surface over the course of the pandemic is the conversion of hotels into alternative use, such as affordable housing, rental apartments or senior-living facilities. These conversion opportunities allow investors to maximize asset value, diversify risk and deliver long-term returns.
“When the government subsidies end, there’s going to be blood in the waters and it will be interesting to see what opportunities arise from a mergers and acquisitions (M&A) perspective,” says Jacob.
Nguyen says 2022 and 2023 will be the largest re-building years as the industry works toward full recovery in 2024/’25. In 2023 specifically, the industry expects to see significant improvements in corporate and group demand.
“The momentum is there and we’re finally in a space that we can call recovery,” says Nguyen. “We saw strong domestic performance, which revealed some positive indicators, but there’s a huge section of the travel industry still missing.”
That said, corporate travel, conventions and international leisure, which could require longer booking windows, will take some time to re-engage despite loosening restrictions and increasing consumer confidence. As a result, popular urban markets such as Toronto, Montreal and Vancouver will lag in the recovery, but investors will be on the lookout for big-city properties as this this type of travel resumes.
By Nicole Di Tomasso