HVS Outlook for the Hotel Industry Updates
HVS was kind enough to allow CIP to place full PDF versions of their latest HVS Outlook for the Hotel Industry reports online for our readers. We will be updating this file weekly, so be sure to check back regularly!
The COVID-19 pandemic and the related restrictions on travel, business activity, and individual movement are having an unprecedented impact on our industry and economy. Hotel owners, operators, lenders, and investors are all facing greater challenges than ever anticipated, as they grapple with plummeting occupancy, average rate (ADR), and RevPAR and seek solutions to mitigate the impact on EBITDA.
Owners and operators are dealing with the current crisis day-to-day, making hard decisions regarding staffing, continuing or suspending operations, and having difficult conversations with their management companies, franchisors, lenders, and investors. Management companies and franchisors are working to identify ways to support their hotels while maintaining a coherent business strategy, while lenders and investors are grappling with fundamental questions concerning risk, returns, and value.
Historical Patterns and Expectations for Performance
We don’t know how long the pandemic will last, how long the related restrictions will be in place, or how much worse this could get for our industry. We also don’t know the final net impact on the economy or the depth and duration of the downturn. We do know that these events will have, and have indeed already had, a significant impact on hotel values.
While it is difficult to assess the full impact, an examination of value trends in prior cycles can provide some useful guidance. Those historical patterns, together with an understanding of the market’s current expectations for the ultimate recovery of the industry and its performance, provide guidance for the probable trajectory of decline and recovery for hotel values.
Hotel Values and Market Cycles
EBITDA is defined as earnings before interest, taxes, depreciation and amortization, and for hotels, it includes a deduction for management fees and a reserve for replacement.
The volume of hotel transactions and the price paid for individual assets are influenced by two principal factors: the availability of capital and the performance of the lodging sector as a whole. When the industry is performing well and financing is available on favorable terms, investors are attracted to the market, and both prices and the number of transactions increase.
These market conditions often induce sellers to put their properties on the market, further fueling the pace of transaction activity. Conversely, when hotel performance declines significantly, generally due to a contraction in demand caused by an economic downturn or, in this case, the pandemic, owners refrain from selling their assets until the market improves.
Additionally, many hotel lenders withdraw from the market, making hotel financing less available; the debt that is available is usually characterized by lower leverage and higher interest rates. As a result, transaction activity drops off significantly. The impact of these influences results in a cyclical investment market, recording peaks and valleys in response to changes in the capital markets and the economy.
Thanks To Our HVS Regional Contact
Desiree M. Flanary, MAI
Senior Vice President, Portland
HVS has been supporting the hospitality industry in the U.S. and around the world for over 40 years. Our senior staff represents a collective 300+ years of experience advising our industry, including through multiple prior cycles and events.
Our expertise covers the full range of hospitality assets and spans the full lifecycle of a hotel, including services that support developers, owners, operators, lenders, and investors. With 40+ offices in markets across the U.S., we offer local insights on a real-time basis.
This knowledge and experience is available to support you as you navigate these challenging times. Our platform is fully functional on a remote basis, so even though we are not currently traveling, our staff can access the full resources of HVS on your behalf.