What's Happening With Hotels in This Economy? Which Markets Are Thriving? What Type of Hotel Should You Invest In?

Commercial Real Estate Investing From A-Z

What’s going on with hotels in this economy? Which markets are they thriving now? What are the benefits of investing and operating hotels? What are some types of hotels that may be great investments today? Julie Surago, Vice President at Olive Tree Holdings shares her insights.

You can read this entire interview here: bit.ly/3G2PLVO

What is going on with hotels today?

Through COVID, you would expect that hotels got hit the most because of the stoppage and most travel both business leisure and international group, and yet hotels were able to weather the storm based because of the PPP loans that were given out by the government. And each hotel employs a fairly large number of people anywhere from Best Western which has 20 employees up to 1000, and Marriott which might have 200 employees and they took advantage of that. So, there wasn’t a lot of distress in the market that we really expected to see. In fact, my firm was going to try to find some opportunities in the hospitality and real estate investment market, but it never really transpired.

What are some of the benefits of investing and operating hotels? It's very hands-on and you have people moving in and out on a daily basis, but are the returns better?

The biggest challenge with hotels today is staffing. Every industry is having trouble with staffing, especially the hospitality industry, hotels, and restaurants because there are a lot of turnovers and there are not as many international H-1B1 visas. However, the biggest benefit of a hotel versus any other type of real estate class is in times of inflation, when the value of the dollar is going up, hotels can react quickly. They set their rates every single day so you'll notice when you look at, not just hotels, but airlines, the prices are going up pretty significantly along with everything else. Whereas, if you have a multifamily lease or an office lease, retail, or industrial, some of those either get reset once a year or get reset every five years which is a lot harder to react to inflation.

If you were to purchase a hotel today, what are some of the major things you would be looking for?

I look for upside. If you're looking at a hotel, maybe it has a brand that is strong, but there should be an opportunity to "upmarket" something. What has been attractive for hotel investors is the ability to assume a loan at a fixed interest rate. There are a lot of hotels, particularly midscale hotels with limited service, that are on long-term CMBS loans and maybe they have a fixed interest rate of 4.5% which is extremely attractive right now. Another thing that has been attractive for people and also for some sellers is the big firms that have the ability to do so are offering seller financing at terms lower than what you can find in the market. I'm seeing hotels that were not attractive buys five years ago, but sellers are able to sell them now because they can offer that financing at cheaper returns, which really improves the upside, at least in comparison to what you can find.

What kind of hotel size would you look for?

I'm really into limited-service hotels. The resorts and full service are very attractive and fun to own but limited service usually is easier to operate. Fewer employees and a lot cheaper to buy. Another thing that is always been attractive to me is to buy nicer economy hotels. I think those weather the storm really well as far as any kind of economic disruption, whether that be building like Qantas or Wyndham micro hotels,

Julie Surago

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