The pandemic hit the U.S. hotel sector hard in 2020. Between travel bans and the economic downturn, the impact to the sector which had already shown some cracks was swift and steep. Transaction volume in the sector fell by more than two-thirds compared with 2019, to the lowest level since 2009.
However, the misery was not experienced equally across all chain scales. In 2020, investors had a clear preference for economy branded hotels. This segment of the market saw volume fall only 22% versus the prior year. To put this in context, the only core U.S. asset class to perform better than this last year was the industrial category.
As the predilection for economy branded hotels grew, so did the segment’s market share. Between 2015 and 2019, investment in economy hotels made up an average of 5% of the market. In 2020, this number climbed to 16%, according to Real Capital Analytics data. Midscale hotels also garnered a greater slice of investor interest in 2020, with 30% of total hotel investment.
Underlying the division between the economy and midscale side of the market and the upscale and luxury side is the distinction between leisure and business travel. The price sensitivity of leisure travelers makes them the primary occupants of economy and midscale hotels, while revenue for hotels on the higher end of the market is driven by business and group travel. With expectations for leisure travel to recover more quickly than business, investors are focusing on the portion of the market where they expect a more secure income stream.
Sales out of distress were in little evidence among economy branded hotels last year. Less than 1% of the sales volume of economy chain hotels involved a distressed asset. By contrast, luxury hotels acquired out of distress represented 12% of the luxury market in 2020, and for upscale hotels and even midscale hotels this value was 7%.
For some players, distress in the sector presented a redevelopment opportunity. In 2020, 8% of hotel investment volume was committed by those intending to redevelop those assets. As percentage of total investment, the share of redevelopment in 2020 is the highest level since the 2008.
To learn more about the data behind this article and what Real Capital Analytics has to offer, visit https://www.rcanalytics.com/.
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