JLL’s Hotels & Hospitality Group has released its annual "Global Hotel Investor Sentiment Survey," reporting investment activity for the first half of 2021 at $30 billion, inclusive of entity-level deals (an investment or acquisition of a company or a real estate investment trust in order to access its real estate holdings), with a surge in optimism for the industry as investors show signs of increased activity.
That $30 billion represents an increase in sales activity of 66 percent year over year and is 4 percent less than the level achieved over the same period in 2019. According to the report, the level of activity observed during the first half of 2021 was primarily driven by an “extraordinary” boost in portfolio activity, driven by entity-level deals, including the Blackstone Group's acquisition of Bourne Leisure in the United Kingdom for a rumored $3.9 billion and the Blackstone Group and Starwood Capital Group's acquisition of Extended Stay America for $6 billion in the Americas.
Investor Sentiment Overview
The report called 2021 “a year of two halves,” and predicted the pace of investment activity would accelerate throughout H2. "Heading in to the second half of the year and early 2022, there should be more quality properties that come to market, with willing and able buyers looking to close deals," said Geraldine Guichardo, director, JLL Hotels & Hospitality's research team.
More than half—51 percent—of investors said that they would employ a substantially increased to aggressive investment acquisition strategy in 2021, up 16 percentage points from 2019 and 2020. Meanwhile, 29 percent of respondents indicated interest in over $200 million worth of assets, up from 25 percent during the onset of the pandemic, and 70 percent of investors anticipate their property portfolio revenue per available room will return to 2019 levels in three to four years.
According to the survey, hotel investors have their sights on Europe, North America and Southeast Asia as activity picks up. In particular, Asia Pacific hotel transactions totaled $3.7 billion in the first half of 2021, with a significant level of institutional investor funds flowing into hotel assets. With wider vaccine rollouts, North America’s market is opportunistic, with domestic travel continuing to increase and drive-to leisure markets experiencing a flurry of travelers. Investors eyeing European assets are encouraged by the increasing vaccination rate, with many expanding their strategies to consider less dense markets, with the diversification of assets being top of mind.
The Americas accounted for nearly 70 percent of total global hotel investment volume in the first half of the year because the region benefited from a high proportion of the population being vaccinated and demand ramping up faster than expected upon cities lifting their restrictions. At the same time, activity across Asia Pacific and Europe, the Middle East and Africa remained more subdued given lower vaccination rates, recent COVID-19 outbreaks and renewed lockdown and travel restrictions, according to JLL.
Last year, navigating a zero or negative cash-flow environment coupled with a high degree of uncertainty surrounding the lodging industry’s recovery profile posed various challenges for investors underwriting hotel acquisitions, according to the company. This resulted in 2020 surveyed cap rates increasing an average of 120 basis points globally when compared to 2019. In 2021, investor cap rate expectations compressed an average of 30 points globally, driven by a decrease in the Americas and in Europe. Cap rates in the Americas and EMEA compressed 18 and 42 basis points, respectively, relative to prior year survey expectations, while APAC surveyed cap rate expectations remained largely unchanged.
Future Priorities
Investors’ sentiment suggests that, for the time being, full-service hotels will endure the deepest discounts because select-service and economy hotels were less impacted by the pandemic and still able to fill rooms, according to JLL. In fact, nearly 50 percent of respondents expressed that the best investment opportunities to emerge over the next six months will be full-service hotels.
"We expect the first half of 2022 to look similar to this year and for more transaction activity to occur in the second half of 2022 as fundamentals inch closer to 2019 levels and corporate, group and international demand see more positive momentum," said Guichardo. "By 2025, we see a more normalized trading environment with fundamentals fully recovered."
With 70 percent of respondents anticipating their property or portfolio RevPAR to return to 2019 levels in about three to four years, investors are keen on operational changes and re-evaluating strategy, the survey showed. Investors indicated the following to be key operational focus areas:
- Profitability improvement measures, such as service and amenity offering evaluations and labor optimization.
- Sustainable operation programming and enhanced focus on environmental, social and governance issues.
- Guest-facing and back-of-house technology implementations.