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9.29.2020

Investing in Times of Crisis

While the impact of the ongoing coronavirus pandemic has been profound on brands and businesses around the world, the hospitality sector has been hit particularly hard.

As the American Hotel & Lodging Association (AHLA) revealed in a recent study, the scale and scope of the shutdown that began this past spring has been historically disruptive. Close to 9 in 10 hotels have been forced to furlough or lay off employees. As of late July, just 24% of hoteliers reported staffing levels recovering to at least 60% of pre-COVID numbers—and nearly 3 in 10 were still at or below 20% staffing. Just over one third of hoteliers have not yet been able to bring back any of their furloughed employees, and more than half of the 600 owners responding to the survey reported being at risk of losing their property entirely due to foreclosure.

Industry professionals are naturally asking themselves what the long-term implications might be for this dramatic 2020 drop-off—as well as what liabilities and opportunities exist in the weeks and months ahead for hotel owners and investors. To answer that question, we first need to take a closer look at the current state of the hotel investment landscape.

Black swan; silver lining

While the headlines are grim, savvy owners and investors understand that it is precisely the unusual nature of the current disruption that provides some reason for optimism. Investors have long warned about the possibility of a “black swan” event: the kind of unprecedented large-scale catastrophe that disrupts normal economic and industry cycles and leads to a global economic shock. That much-discussed type of event is now here, and while no one is happy about it, we also have to recognize that this is not normal. We can reasonably expect a fairly swift and dramatic recovery once we turn the corner and the worst of the crisis is behind us. While the short-term financial impact has been dramatic, the long-term implications for investors are likely to be much less severe.

The expectations disconnect

Lenders have generally been flexible when it comes to restructuring payments for distressed properties. Over the last six months, hotel owners and operators have not only learned to operate more efficiently, they have successfully implemented comprehensive new health and safety measures. This has reassured some guests and contributed to a gradual reopening for properties in many markets. We’ve learned more about the relatively low risks of transmission for properties that follow rigorous health and safety standards like the Clean and Safe protocol, and have begun to see a modest up-tick in bookings. Despite this slow-but-steady movement in the right direction, the hotel investment marketplace remains in a holding pattern. Buyers are still hesitant to pull the trigger, however, even when presented with unique opportunities. The structural disconnect that is the fly in the transactional ointment is that sellers’ pricing expectations remain relatively unchanged. The depth of marketplace uncertainty has left sellers reluctant to accept that the foundational value of their property has changed in any long-term way—and buyers are unlikely to take action unless a deal reflects current pricing realities. Buyer and seller expectations must come into alignment before investment activity picks up.

Adversity and opportunity

Despite that sluggish investment landscape, it’s clear that some asset types appear to be more attractive candidates for acquisition than others. Does current performance reflect long-term value, however? For example, highway-side hotels and leisure properties may look like a better bet today, but the longer-term view is quite different. Despite speculation about the “end” of downtown hospitality opportunities, the reality is that the costs of development and limited opportunity for new properties in crowded urban cores makes those competitive environments more stable and predictable. Highway-side properties are still susceptible to being outflanked, and the strength of the leisure segment is almost certain to be less pronounced in a healthy hotel marketplace. Making thoughtful investment decisions in the current environment means looking beyond the current landscape. It requires an ability to account for COVID-related changes, while still placing them in the proper context.

Investors who can do that will be able to avoid missteps based on overreacting to current conditions, while still identifying and capitalizing on opportunities to acquire properties that may not otherwise have come on the market. In other words: think critically about what drives long-term value. That isn’t always easy to do in a crisis, but the immutable truth is that demographics and location will continue to drive smart investment decisions. While short-term operational and strategic portfolio decisions will necessarily consider COVID-related factors, it would be unwise to let the highly unusual circumstances of a pandemic influence long-term investment strategies. As a rule of thumb, it still makes sense to only buy properties you would feel comfortable hanging onto for ten or more years. Remember the Warren Buffet quote that “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”

The game-changer

A hotel industry bailout package could change everything, of course—virtually overnight. Something like the proposed HOPE Act, legislation designed to help struggling hotels (and other commercial properties) with mortgage payment relief would be a true game-changer. A bailout package or legislative remedy on that scale could upend current assumptions and dramatically change the deal flow landscape. Owners and investors would be wise to pay close attention in the weeks and months ahead. Stay informed about proposed or pending legislation, and factor that into the investment calculus while looking for lucrative opportunities in the turbulence of a still-tentative recovery.

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