In the months before the COVID-19 pandemic, many lenders viewed hotels favorably. It was logical to assume that the business environment wouldn’t fundamentally change and that the hotel industry could keep expanding despite occasional downturns. Nobody could have predicted the health crisis or the massive changes it would bring.
Business methods have changed in ways nobody could have predicted even if they had a magic 8 ball, the old-fashioned game where you seek answers to hidden mysteries of the future. Companies are allowing more employees to work from home. People have more flexibility to leave metropolitan areas. As a result, vacancies for all types of commercial properties have increased in major cities. Downtown cores are somewhat out of favor. And, yes, hospitality occupancy rates are down, but will they stay down? Realistically, the answer is probably “yes” in many markets.
If companies downsize their space in central office buildings or relocate outside major cities altogether, the hotel sector has a long-term problem. In this scenario, fewer businesspeople will book rooms in these cities. But even for companies that opt to keep their employees at the office, hotels are still bound to lose some business. This is because COVID-19 and modern technology have changed how we do business.
Rather than jump on an airplane for a meeting in a crowded hotel conference room or one at a company’s headquarters, we’ve become accustomed to logging into Zoom via our high-speed internet connection from the comfort of our home office. The remote meeting is now an accepted alternative to a face-to-face meeting.
According to the Global Business Travel Association’s 2021 outlook, worldwide business travel is expected to increase by 21% this year after dropping by 52% in 2020, an increase attributable to widespread vaccine rollouts. But the trade group projected that business travel isn’t likely to recover to pre-pandemic levels until the middle of this decade. For the U.S. hospitality sector, the fallout from this shift is obvious. Hotels can expect less business travel for the next several years.
Rather than jump on an airplane for a meeting in a crowded hotel conference room or one at a company’s headquarters, we’ve become accustomed to logging into Zoom.
Foggy future
The outlook for destination-based business conventions is yet another question mark. Although live conventions have resumed this year, it is not yet clear if these events will be as popular as in the past.
Do we really need to physically place ourselves in a crowded bar after a day on our feet in a convention center to hear exactly what we could have heard on a live, online conference feed while resting on our couch? Opinions differ about the benefits of face-to-face meetings, but many companies may choose to stay home.
It is widely assumed that vacation travel will rebound quickly. Many people want to get away after a year of being cooped up at home. All of us desire a change of scenery and hotel operators can count on these travelers. But is this increased demand enough to make up for losses in business travel and conventions? It is unclear how many guests will occupy a hotel, how much debt service can be generated from occupancies and for how long. Can a market support a new venue? These are difficult questions that have no clear answers. One would do almost as well by asking a magic 8 ball for the answer.
Orlando is an example of how uncertain the outlook is in some markets. The city’s hotels did well in a market supported by convention attendees, as well as family vacations to Disney World and other attractions. Today, however, Orlando’s hotels can no longer automatically count on large convention business as they have over the past decade.
But Orlando’s hotels also will be hurt because local theme parks have implemented coronavirus-related restrictions and, in some cases, are limiting the numbers of park guests. In this regard, Orlando’s hotels have short- and long-term problems involving a temporary reduction in vacation travelers, and a possibly permanent reduction in convention business. This same scenario applies in other cities with a mix of themed attractions and conventions.
This isn’t to say that there isn’t some good news on the hospitality front. There are proven markets that have an unfilled need for hotel rooms. Many hotels located in suburban markets could get a boost if more companies relocate their offices from the downtown cores of major cities.
With the relocation of many corporate offices to suburban markets, a need exists for hospitality services in underserved markets.
Tepid forecast
With the relocation of many corporate offices to suburban markets, a need exists for hospitality services in underserved markets. For example, corporate offices have been moving to Palm Beach County, Florida, which once relied almost exclusively on vacation travelers. Several financial-services companies plan to relocate to downtown West Palm Beach. This city, located just north of Fort Lauderdale, is even being dubbed “Wall Street South” due to the interest being shown by these types of companies.
With an influx of corporate offices, Palm Beach County can now morph into a mixed market as more business travelers stay overnight. This likely means that it can sustain more hotel rooms, and lenders will be more willing to fund these projects if the proposal can be substantiated with the hard data needed to support a new commercial mortgage.
Domestic travel also has increased in many markets as people hunger for a break from living and working from their homes. A May 2021 article in The Wall Street Journal, for example, indicated that domestic air travel was already surging to destinations in Florida such as Key West, Sarasota and Orlando. Certain parts of California, North Carolina, Arizona, New England and other markets also have seen a spike in demand for hotel rooms.
On a national basis, forecasters brightened their outlook for hotels after a stronger-than-expected first quarter of this year. STR, for example, predicted that hotel occupancy rates will rise nearly 12 percentage points this year to reach 53.3% and will climb to more than 60% in 2022. The recovery in revenues, however, will take longer. At the end of 2022, revenue per available room (RevPAR) is estimated to remain 18% lower than its 2019 level, according to STR, and is not expected to reach its pre-pandemic level until at least 2024. Likewise, CBRE projects that RevPAR won’t eclipse its 2019 level until 2024.
Winning proposals
One thing the pandemic has taught lenders is that hospitality markets have changed — and likely for the longer term. Although the outlook is still cloudy in many markets, lenders are actively searching to fund solid hospitality opportunities.
Mortgage brokers who are looking to place debt for construction of a new hotel or the refurbishment of an existing one shouldn’t let the asset type scare them. If your foundation is solid and you can show the lender a logical proposition, there is a good chance of success.
You’ll need to show a logical sources and uses statement, and prove that the market can support the hotel. The borrower should expect to make a realistic equity investment and come to the table with a reasonable projection for debt-service coverage. If you can check these boxes, you will have an excellent opportunity to reach the closing table.
Keep in mind that debt providers are in business to disperse capital, but they will only consider logical opportunities supported by real equity in a market where the data and demographics speak to the likely success of the venture. A good presentation based on factual data will provide the information needed to make your lender an ally and partner for success in financing hotels during these uncertain times. ●
