“The only constant in life is change.” -Heraclitus
With the world seemingly upside down right now due to the COVID-19 virus and its impacts on the market, the saying, “The only constant in life is change” by the Greek philosopher Heraclitus rings true more now than ever before. Although it takes a bit of perspective to see change as a good and useful part of our lives—and particularly of our financial lives—there is always a positive spin if you keep an open mind.
This viewpoint can be applied to the current health crisis and its economic and financial impact on the hospitality and travel industries. When times are good, money flows easily and cheaply, with less restrictive barriers to funding for acquisition, property improvements and other types of loans. In the good times, everyone wants to share in the financial success and the market can easily become “overgrown.” Competitive properties are built and sold, new brands are born, upstart companies take a share of established business, and profitability is leveraged across a larger field. But no upcycle lasts forever and a correction is inevitable.
As unprecedented as the current health crisis is, in many ways the financial impacts are no different than other market downturns the industry has experienced and recovered from previously. Although both STR and HVS agree in their projections that RevPAR will decline by as much as 45% for 2020, those losses should be close to a full recovery by Q4 2021 and the market will again be on a positive trajectory. Without question, the recovery won’t be nearly as fast as the decline, but it should yield several years of double-digit RevPAR growth that will spawn a wealth of opportunity for those who are patient, steadfast and wise with their investments and capital.
For hotel investors, the pandemic will likely produce an increase in buying opportunities, due to variables that include distressed assets, foreclosures, increasing supply and lower property values. Potential distressed sellers will be looking to recapitalize or sell at a discount relative to replacement cost and prior value. These bargains will benefit those in a position to acquire the assets as a long-term investment strategy that will pay off as the market recovers. It is also important to note that once RevPAR rebounds, hotel EBITDA will increase significantly as positive operating leverage returns. This explains why hotels are extremely popular investments when EBITDA bottoms out and revenue begins to recover.
While full-service property values tend to be more volatile during a downturn, limited service and economy hotel values are slower to react due to their lower operating leverage, which lessens EBITDA fluctuations during an economic cycle. These transactions are less impacted by the capital markets, due to the smaller size and lower value of these assets, as well as the entrepreneurial profile of the typical buyer/owner operator.
Lower occupancy levels as a result of travel restrictions have also created opportunities for property improvements that will position those hotels well during the recovery period when the market is likely to be more competitive. There may also be positive implications to the supply chain in the hotel market, which may be re-focused domestically, as the outbreak caused global disruptions. The prevailing thought is that the industry would be better equipped to handle a similar pandemic in the future if more operations were located in the U.S. This may create additional opportunities outside of traditional investment strategies.
With the eventual recovery in mind, it is a good time to take the “silver lining” approach and look for the opportunities that come out of chaos. Take advantage of market conditions that allow you to be creative and strategic, as you plan for long-term growth opportunities.