JLL Hotels & Hospitality has released its "2021 Hotel Investment Outlook," covering the company’s overall global outlook on the industry and overarching trends.
While “uncertainty and cautiousness” plagued hotel investor interest in 2020 due to the COVID-19 pandemic, the commercial real estate services company believes the global lodging industry is poised to rebound in 2021. In the report, JLL claims the hospitality industry’s resilience “shaped new experiences and demand from consumers” while also accelerating trends as hoteliers shifted operations and strategy.
At the beginning of 2020, JLL expected global hotel liquidity to be down 10 to 15 percent by the end of the year. Instead, global transaction volume ended more than 60 percent down on 2019 levels, with nearly 50 percent of all transactions closing within the first three months of the year. The more flexible operating environment deterred owners from putting their properties up for sale, the report noted, and as a result, acquisitions were largely on hold. Most deals that were completed over the year were “well underway” before the pandemic.
Although challenging to navigate through a zero cash-flow environment, lenders granted forbearance agreements where possible. With many of those forbearance agreements slated to end soon, Geraldine Guichardo, director of JLL Hotels & Hospitality Research Team, noted the need for governmental support. “Additional government relief will provide owners with much-needed capital to alleviate the challenging operating environment,” she said. “It may also help counter the daily cash-burn rates many properties are facing. For some properties, this level of support will be enough to survive the pandemic, while for others, the prolonged recovery timeline will be too long to continue holding on.”
Private equity groups and institutional investors capitalized on assets that were made available for sale and drove liquidity in 2020 by accounting for 54 percent of total volume in the year. Investors responded to shifts in hotel demand and leisure traveler preferences by adjusting their investment strategies to acquire assets in markets that fared better during the downturn. Approximately 21 percent of global hotel investments were in resort markets, signaling the current investment appeal of less dense markets. This niche group of investor interest is expected to be a catalyst in driving hotel investment volume upwards of 35-40 percent from 2020 levels.
Guichardo said resort investment was a favorable trend prepandemic, “given its demographic trends and supply dynamics.” The outbreak has accelerated investment in this segment, she added: “Investors are currently attracted to markets that are expected to be the first to recover.” Drive-to and resort markets have fared better than urban markets as travelers seek the safest options available, making these assets appealing.
“However, we may also see high-quality assets become available for sale at attractive prices in urban markets,” she added. “These prices may be too appealing to a well-capitalized investor to pass up.”
While the pandemic will have long-term implications on the industry, JLL noted some short-term trends to keep in mind.
1. Private equity groups and high-net-worth individuals will continue to be active investors of hotel assets in 2021. According to the report, $24.5 billon in capital was raised in closed-end funds targeting hotel and hospitality assets globally in 2020, matching 2016 levels. Additionally, all regions globally are seeing a flurry of fundraising activity with opportunistic capital ready to mobilize on distressed assets, allowing nontraditional investors to get a piece of the lodging pie at a competitive price.
“This is a positive for the industry,” Guichardo said of the trend, which JLL expects to drive the bulk of liquidity in 2021. “Not only does this phenomenon expand the pool of liquidity providers to the industry, but it also allows owners with a fresh perspective to mark their presence in the hotel space. These owners can help push the reinvention of the hotel experience in a post-COVID-19 world.” Nontraditional investors that seek to acquire hotels for conversion will help remove some of the older, lower-quality hotels from the market, she added.
2. The “manchise” structure—a management contract that can be converted to a franchise agreement—is on the rise as hotel parent brand companies evolve from traditional management agreements. 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. “This will help all parties involved with the ownership and management of a hotel better align their incentives, which is more important now than ever before given the challenging operating environment,” Guichardo said. “This will also support hotel parent brand companies as they expand their geographic footprint as these agreements are more versatile and flexible.” Manchises also potentially can result in lower overall fees for a hotel owner while also making hotel parent companies more competitive in the hotel management space, according to the report.
3. Consumer preferences drive hotel room redesigns and the acceleration of technology advancements. As travel gradually resumed during the pandemic, travelers displayed noticeable preferences for larger, individual and private accommodations to stay for longer periods of time and work remotely.
JLL credits this specific type of demand to the outperformance of extended-stay hotels and vacation/residential rental options over the greater accommodations industry. “Travel patterns during COVID-19 further highlighted the appeal of this hotel product,” Guichardo said, predicting that the shift in consumer needs and expectations will support the growth of this segment in years to come. “The hotel product will likely face increasing competition given the growing prominence of vacation homes and alternative accommodations, which will only force owners of this product to find ways to make it better and more modern.”
4. Additionally, operators accelerated their technology advancements as touchless/contactless service became a priority for consumers. Hotel amenities and roomservice, including food delivery, mobile reservations and contactless check-ins, and the emergence of hybrid conferences for meetings and event planners, also took center stage.
5. Pressure to prioritize real estate investments grounded in 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 race 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.
JLL suggests hoteliers and investors remain agile and adopt changes as the global lodging industry continues to be tested in ways it never has. Additionally, traditional brands are being forced to re-examine 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 re-experience 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, according to the company.