To say that the year of the pandemic has been tumultuous for the travel and tourism industry, would be an understatement. Few other industries have been affected by the restrictions imposed by authorities as this one has, and few have managed to bounce back in between these periods of restrictions as quickly as it did.
At the core of anything tourism and travel related is the hospitality sector, which also presents some pretty attractive real estate opportunities on a regular basis. However, these times are anything but regular, leading many investors to ponder whether this is a good time to invest in hotel real estate.
What makes a hotel profitable?
As opposed to profit from most other types of real estate (namely the rent collected), which is regularized by a contract for the long term, hotel revenue can be very unpredictable. The upside is that supply and demand are ever adjusting, meaning that hotel owners have the capability of changing prices for optimal profit on a daily, even hourly, basis.
The downside is that without a long-term contract, there are no guarantees. While a tenant in an apartment or a store commits to a yearly rent rate, a guest at a hotel usually commits to no more than a few nights. In order to truly understand a hotel’s profitability, numbers like total revenue, occupancy rate, room amount, daily expenditures, and other figures come into play. Add to that the need to calculate these digits during different seasons, for a high-and-low estimate, and you get quite a confusing formula.
2020 and 2021 (so far) have both been extreme for hotels all over the world. There were periods when they were forced to shut down, as well as times of very low occupancy - mainly a result of the public’s fear of the virus. On the other hand, there were also times when demand was very high, especially in between waves when there was a feeling of euphoria among vacationers.
Naturally, hotels which are more upscale were the ones to be more influenced by the turbulence, while the select service hotels faired better. Skyline Investments, a Canada-based hotel and resort owner and operator, is a good example of that. Beginning its way in Ontario in 1998, the company currently owns luxury hotels and resorts in the U.S. and Canada, along with a portfolio of select service hotels. It has even been named among the best managed companies by Deloitte for two years in a row - no doubt, a player in the hotel game.
“If there is one thing I can say about the previous 14 months, it is that they have been very inconsistent,” commented Blake Lyon, CEO and director of Skyline Investments. “I have years of experience in managing hotel and resort assets, and what we’ve seen in the past year or so is unprecedented. Our full service hotels are large and cater to middle and upper classes, so you can imagine what this volatility has done to those hotels, however they are bouncing back now. Our drive-to resorts were able to perform reasonably well through the pandemic, and our select service hotels have managed to get through better than the full-service, and are almost back to historical occupancy levels.”
Skyline is not alone here. Brandon Boyer, the general manager of one of the hotels belonging to the reputed Atrium Hospitality company, talked to us from the lobby of the hotel he runs in Jefferson City, Missouri. Atrium currently owns and operates 84 hotels in 29 states, including some well-known brands such as Marriott, Ramada, Westin, Hilton, Holiday Inn and others.
Today, Brandon’s hotel is almost back to normal activity, but his face still looked worried. “It was devastating, we just took a huge hit and there’s nothing to compare it to,” he confessed. When we asked him about capacity percentages during the first month of COVID-19, he surprised us and answered, “It went down to single digit overnight.”
Back to the future
With these numbers known, investors have shied away from the hospitality real estate sector. This can be a plus, though, since prices are becoming more attractive. On the other hand, if there is no certainty in sight for this industry, there’s no real reason for investors to start looking in this direction again.
2021 is showing signs of returning to normal, but that depends mainly on the spread and control of the pandemic - which also varies between regions and nations. It’s not solely about the virus, because measures taken by legislators to compensate hotel owners are also an important factor. As Lyon added, “we were lucky to receive subsidies and compensations from the American and Canadian governments, but that is sadly not the case in other countries. The industry in Canada and the US is coming back quickly and these helpful subsidies are now easing off. 2022 is looking like it will be a very busy.