Commercial Investment Real Estate Spring 2021 | Page 38

SETTING THE SCENE Before looking ahead at what hopes to be a sunny future , 2020 deserves a complete reckoning to fully understand the damage caused in the wake of COVID-19 ’ s arrival on American soil . Numbers cannot tell the entire story , but the narrative they do share is an ugly one .

According to a February report from CBRE , overall demand for hotels dropped 35.9 percent in 2020 compared to the previous year . Occupancy dropped 36.8 percent . Average daily rates dropped 29.6 percent . The most telling is that RevPAR ( or the revenue generated per available room ) dropped a whopping 55.5 percent .

“ U . S . hotels suffered the worst annual occupancy level in 2020 since the Great Depression in the 1930s ,” according to the CBRE report . “ The biggest declines in RevPAR in 2020 occurred in larger gateway markets . These markets suffered from a lack of group demand , fewer inbound international travelers , and a reliance on airline travel .”

What has proven so devastating about the pandemic is just how quickly and completely demand vanished . Hotels , to nobody ’ s surprise , exist on a day-to-day influx of room reservations , with food and beverage income and other ancillary spending flowing from the occupancy . Hotel owners

and operators watched demand for their offerings vaporize in a matter of hours in March 2020 , as state and local governments across the U . S . announced shelter-in-place orders and lockdowns .

To punctuate COVID-19 ’ s crushing effect on the hospitality industry , look to the spike in delinquency rate for commercial mortgage-backed securities . Chugging along around 1.5 percent at the end of 2019 and into 2020 , it spiked to 24.3 percent in June and

ROOM FOR RECOVERY

has remained above 20 percent since the onset of the pandemic — that means one in five properties are still in immediate danger . The overall CMBS delinquency rate jumped to 10 percent , fueled largely by lodging and retail .

But after the initial shock of the pandemic , activity began to resume in various sectors of the travel and leisure industry , with hotels opening to a completely altered consumer landscape .

“ Leisure travel proved to be a stronger segment of demand throughout the pandemic as travelers experienced lockdown fatigue and planned last-minute trips , escaping to drive-to destinations ,” according to JLL ’ s Hotel Investment Outlook for 2021 .

On a year-over-year basis , the numbers were as bleak as expected . But relative to days immediately following the initial lockdown , occupancy rates , for example , began to inch upward . Overall occupancy for all hotels cratered from 63 percent in February 2020 to 20 percent in April , according to CBRE . But that figure gradually increased through

U . S . Hotel Property Buy / Hold / Sell Recommendations

Fort Lauderdale , Fla . West Palm Beach , Fla .

Cape Coral / Fort Myers / Naples , Fla . Orlando

Charleston , S . C . Austin , Texas

Miami

Tampa / St . Petersburg Washington , D . C . Jacksonville , Fla .

Deltona / Daytona , Fla . San Antonio

Raleigh / Durham , N . C . Nashville , Tenn . Greenville , S . C . Knoxville , Tenn .

Louisville , Ky . Virginia Beach / Norfolk , Va .

Tallahassee , Tenn . Portland , Maine

23 % 23 % 22 % 22 % 21 % 16 % 15 % 14 % 14 % 14 % 13 % 11 % 10 % 9 % 9 % 7 % 7 % 7 % 5 % 0 %

40 % 41 %

56 %

38 % 45 % 59 %

45 % 46 %

52 %

36 % 50 % 56 % 53 % 56 % 48 % 47 %

33 %

60 % 53 % 64 %

37 % 36 % 22 % 41 % 34 % 25 % 39 % 40 % 34 % 50 % 38 % 33 % 37 % 35 % 43 % 47 % 60 % 33 % 42 % 36 %

the summer months , holding steady between 40 and 50 percent before increasing rates of COVID-19 in November pushed occupancy back down .

Luxury hotels bore the brunt of this difficult market , with occupancy down 71.8 percent year-over-year in 4Q2020 , while upper-upscale properties saw a 64.2 percent YOY decline . Economy hotels , meanwhile , saw an occupancy decrease of only 14.8 percent in 2020 .

ROAD TO RECOVERY While 2020 has become synonymous with chaos and disruption , COVID-19 and its fallout didn ’ t disappear when the calendar flipped to the new year . But as vaccines were approved , distributed , and now being administered across the country , the hospitality real estate market can begin to look ahead to the future of the sector .

“ A lot has changed in a year ,” says Bram Gallagher , Ph . D ., senior economist with CBRE . “ The pace of immunizations has increased , and we ’ ve had two recent stimulus packages — it ’ s been mostly good news of late . That being said , the first two quarters of 2021 are still going to look a lot like the last half of 2020 . But the market is improving and should return to near 2019 performance in aggregate by late 2023 or 2024 realistically .”

Leisure travel is expected to return relatively quickly , with millions of people ready to escape after largely remaining in place for a year plus . Business and international travel , however , could continue to remain depressed . For the everyday traveler , the increasing vaccination rates provide hope of a return to something in the realm of normal .

“ It really comes down to confidence ,” says Lesser . “ Frankly , that ’ s what ’ s missing for a lot of people right now — the confidence to get on an airplane or stay at a hotel . [ These properties ] have been proactive in trying to build that confidence , but I don ’ t know if it ’ s up to hotels , airlines , and rental car companies . To some extent , it just comes down to getting vaccines in arms .”

Deals in hospitality real estate , meanwhile , should inch upward after last year , which saw overall volume drop by 60 percent , according to JLL .

“ We predict that global transaction volume could be up between 35 to 40 percent in 2021 ,” says Guichardo . “ The activity will largely be driven by resort markets and urban centers that are highly dependent on fly-to international travel .”

Those primary urban markets — namely New York , San Francisco , Chicago , and Los Angeles — will face difficulties thanks to a reduction in both international travel and air travel from within the U . S . Business travel , which is expected to lag behind leisure , is another roadblock to recovery for these major metropolitan markets .

“ Convention business , group travel — these sectors may be slower to recover ,” Gallagher says . “ Trade shows and conventions , typically scheduled a year or two ahead of time , may not occur later this year . We may see reduced activity which could be a bit of a headwind for large urban markets .”

As daily life ground to a halt through the spring and summer of 2020 , many speculated about what COVID-19 could mean for densely populated cities . Social distancing

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COMMERCIAL INVESTMENT REAL ESTATE MAGAZINE SPRING 2021