Investing in anything always carries a bit of risk, and hotels are no exception. While they require a large initial investment and face competition from AirBnB, building a hotel still offers a great investment opportunity. Many investors are also concerned that we’re approaching an economic downturn; however, research and market projections indicate that the hotel industry should remain strong in the next downturn cycle.
Reasons to Invest in a Hotel
Investing in a hotel is different from the other “big four” assets of CREs for several reasons, the most significant of which is that hotels have nightly leases rather than monthly or yearly. While this means pricing needs to change to match supply and demand throughout the year, it also means that hotel investors can take advantage of seasonal spikes in demand.
Like all CRE investments, hotels also come with the excellent tax benefits of equity growth, tax-free exchange, and depreciation. Like all real estate investments, hotels will suffer from wear and tear over the years, but investors can apply a depreciation expense schedule to reduce their taxable income under U.S. law. Cash equity from a debt refinance is not subject to federal income tax, and investors can avoid tax liability on the appreciated gains of two hotels during a tax-free exchange. In addition to these tax benefits, there are countless other financial benefits to owning a hotel, including leveraging capitalization, operations, and renovations.
Projected Hotel Market Growth
Hotel growth has been on the rise since the end of the recession, though the growth has slowed down in the past couple of years. While the immediate economic future is uncertain, research by statista.com has found that hotel revenue is expected to show an annual growth rate of 4.1% by 2023. Hotel revenue in the hotel industry in 2019 was $368,359, but it’s projected to be $432,095 in 2023. Lodging Magazine also reports that hotels are operating at the highest rate of efficiency since 1960.
Still, while the long-term growth looks promising, HopsitalityNet predicts that 2020 will still have positive growth, but less growth in demand, occupancy, average daily rate (ADR), and revenue per available room (RevPAR) than in 2019. However, they also predict that rates will match or slightly exceed 2019’s statistics by 2021.
Hotels vs. AirBnB and Changing Customer Expectations
Many potential hotel investors are concerned about the changing hospitality market, which includes the rise of AirBnB. However, hotels have not had a long-term impact from AirBnB and continue to remain a safe investment opportunity. There are several factors for this, including business travelers preferring the convenience and predictable amenities of hotels. However, successful hotels need to recognize the current guest expectations in design and operation. Millennials in particular are more interested in eco-friendly hotels with healthy and locally focused amenities, restaurants, and cocktail bars. Consumers are also starting to expect personalized experiences and entertainment, smart in-room technology, and multifunctional spaces. Even though AirBnB isn’t a direct threat to hotels, investors should ensure they regularly renovate and update their design to appeal to guests who want a unique travel experience.
Concerns About Downturn or Recession
Despite the promising long-term projected growth of the hotel industry, our economy is in flux, and we appear to be approaching a downturn cycle. We’ve already given advice on the best ways for CRE investors to weather the downturn, but how much does this advice apply to hotels? Historically, recessions occur at a confluence of high interest rates, high oil prices, and policy issues. While the Fed lowered interest rates in 2019, Bernard Baumohl of The Economic Outlook Group is concerned that it might not be enough to offset decreased global travel as a result of the trade war. In addition, economic uncertainty can cause consumers to spend less, which impacts the hospitality industry. Still, Baumohl estimates that the chance of a recession occurring in the immediate future is low and that we are headed for a slowdown, not a full-blown downturn.
Of course, investors need to be prepared for economic downturns and slowdowns. Hotels can armor themselves in several ways. Investors should actively manage costs with the operations and management team to protect potential slimming margins, proactively plan for unexpected poor performance, and improve the guest experience. In addition, hotels should build themselves as a brand through community involvement and proactive marketing, which can create brand loyalty and higher occupancy rates. Even if a downturn is on the horizon, savvy CRE investors can still take advantage of the growing travel lifestyle and overall increasing margins of the hospitality industry.
Invest in Hotels with Pioneer Realty Capital
PRC has extensive knowledge about the hotel industry, and we can help you build a profitable investment. In addition to market advice, we offer hotel loans to developers, owners, and investors. If you are interested in starting or expanding your CRE portfolio, reach out to one of the financial experts at Pioneer Realty Capital today.