The current state of the real estate industry is certainly in flux, especially with mortgage rates climbing through the roof. This much volatility can make it difficult for real estate investors to find projects that are going to be successful - at least through regular channels. However, new research from CBRE Group has revealed that the hotel and hospitality sector may be an unforeseen bright spot going forward. Here’s why this might be helpful to investors looking for new opportunities.
CBRE stated in their most recent revised forecast that the hotel sector is showcasing demand that’s much stronger than expected. Additionally, occupancy gains are being driven by more modest supply growth. What this has led to is a prediction that revenue per available room in 2023 is likely to reach nearly $98, which is 6 percent higher than it was last year.
The forecast itself is based on large increases in expected occupancy compared to the last time CBRE evaluated the hotel sector this past February. Other differences between February and May include an average daily rate increase of 3.7 percent, slightly less than the original 4.2 percent forecast. The drop is being attributed to greater group travel and “shoulder period” demand as well as lower inflation expectations.
What’s behind the new, encouraging numbers? CBRE officials point to the easing of travel restrictions in countries like China and Japan, as well as group and independent business demand improving. Just in time for the summer travel season, the growth rate will likely remain high through the next few months, declining just slightly to between 4 percent and 5 percent. By the end of the year, this will diminish further in the fourth quarter but still exhibit growth of between 2 percent and 3 percent.
The question here, of course, is how this applies to the real estate investment sector. This should be reasonably straightforward - opportunities to invest in the hotel and hospitality sector are likely to exhibit better growth than investing in traditional revenue sources like commercial or residential real estate at this time. With mortgage rates reaching historic highs exerting increasing amounts of downward pressure on the real estate industry, it’s crucial to begin looking for alternative investments that have a higher likelihood of performing better. In this case, with hotel performance predicted to be brisk throughout at least the rest of 2024, centering your efforts on investing in hospitality-based properties seem like a much safer bet.
It’s widely considered that real estate is perhaps one of the best hedges against inflation. Yet with the Federal Reserve actively combating inflation by raising the US base lending rate, property valuations will begin to decline once more buyers are priced out of the market. This will lead to a general price correction that could erode value from properties you invest in unless those properties are also generating income in other ways. Yet with the hotel sector showing such strong likely growth, the revenue generated from a hotel property’s business activities will offset any potential losses due to devaluation. This makes holding hotel properties as an investment a better opportunity by far, considering the current economic landscape.
While the hotel industry in general is poised to perform well, it’s crucial to point out that just because there’s overall growth that’s being predicted doesn’t mean there aren’t going to be outliers. The last thing you want to do, especially if you’re new to investing in the hospitality industry, is to end up betting on a losing horse. There’s much to consider when it comes to choosing a hotel or hospitality real estate investment to ensure you’re picking a winner, with the chief concern being location. Hotels need to be situated advantageously in the right regions and neighborhoods to attract guests.
Additionally, previous performance is another factor you must consider when choosing a hotel property to invest in. Hotel management staff must have a strong track record of high levels of customer service. No one wants to stay in a hotel where the service is poor or the quality of the rooms is subpar. Unless you’re willing and able to invest heavily in remodeling or taking a hands-on approach to hiring skilled and experienced management staff, it’s recommended that you do your due diligence in selecting a property that’s already performing well before you invest in it to any substantial amount.
The hotel and hospitality industry offers dozens of opportunities for the savvy real estate investor. Hotels can be highly attractive assets, provided they’re managed intelligently and their amenities are up to date. Profitability in the hospitality sector relies completely on the ability of a hotel to source a steady supply of guests, after all, and that means only hotels that offer the best value for money in the most advantageous locations will see continued success.
However, if you can manage to tick these boxes in selecting a hotel property to invest in, thanks to the upcoming market conditions you’re likely to see some rewarding growth over the next several months based on CBRE’s latest market prediction. With so much of the rest of the real estate industry indicating high levels of volatility and with a possible market correction looming in the not-so-distant future, all signs point to hotel property investment as being a much safer bet for a real estate investor looking to minimize their exposure to negative market conditions.
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