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The hospitality industry has had a rocky ride from the onset of the COVID-19 pandemic until now. While most markets have regained their footing, there are still some key changes. As a valuer with roots in the dynamic hospitality industry, my primary role is to act as a mirror to the market, interpreting and reflecting its trends and shifts. Drawing from recent data analysis and conversations with industry leaders and participants, here are some key trends for real estate professionals, hotel owners, operators and investors to watch closely in 2024.
Increased trading volume brings positive momentum
One of the most encouraging trends to emerge from recent discussions is the overall positive outlook for the hospitality industry in 2024. Experts in the field expect transaction volumes to rise significantly compared to the previous year. Many believe there is more agreement between sellers and buyers this year on new price discovery. This consensus of new expectations will stem from a variety of reasons, but from a seller’s perspective, the upcoming large PIP renewal and upcoming loan maturities will be a significant catalyst. In addition, expectations that interest rates may fall by 1 to 2 basis points in the third and fourth quarters also add to this optimism. The expected rate cut is a mechanism to unleash a wave of capital that has been waiting patiently on the sidelines for the right investment opportunity.
The rise of PIP-driven sales
A big driver behind the surge in transactions is the resurgence of Property Improvement Plans (PIPs). Many hotels find themselves at a crossroads, forced to meet strict brand standards by improving color schemes, furnishings and overall aesthetics to stay competitive. During the height of the COVID-19 pandemic, most hotel brands extended mandatory renovation deadlines, providing temporary relief to owners. However, the grace period has now ended and hotel owners are faced with the urgent need to revitalize their properties.
Occupancy rates have rebounded since 2019, but the road to recovery has not been smooth. While some hotel owners managed to build reserves during the post-pandemic ADR surge in 2021 and 2022, others have exhausted resources trying to stay afloat. Securing financing for renovations is a significant challenge, leading some owners to consider selling their properties rather than making extensive upgrades. While the industry is not in distress, prices are expected to normalize, providing sellers and buyers with the opportunity to negotiate favorable terms.
Tax assessment and insurance challenges
One surprising trend to watch is tax assessment issues. Many cities have suffered significant losses in tax revenue during the pandemic, especially from long-term closures of hotels, bars and related businesses. As a result, in 2022 and 2023, municipalities significantly increased the tax liability of hotel owners. On top of that, insurance costs have skyrocketed in many markets, especially Florida, adding to the financial burden on homeowners. However, there has been a glimmer of light recently: Investors and industry professionals expect tax assessments and insurance rates to stabilize soon, allowing hotel owners to better plan and predict future expenses.
Flexible lending and soft landing
Lenders to the hotel industry have expressed strong reluctance to repeat the mistakes of the 2008-2009 financial crisis, when foreclosures were rampant. They are now more inclined to work with owners on a case-by-case basis, offering low-interest loans or even bridge loans to help properties weather the storm. The consensus is that the industry will not see a sharp decline but rather a soft landing. Many lenders have made it clear that their business plan is to lend money rather than repossess properties. They don’t “want the keys back” and are willing to work with the borrower as much as possible. That being said, many owners expect to recapitalize their assets as needed and come to the table with new capital. Lifetime value ratios will be an interesting trend to watch going forward.
“Barbell” Investment Method
From an investor’s perspective, the “barbell” approach has gained considerable traction. Investors focus primarily on two extremes of the market: the luxury and economic segments. On the economic front, extended-stay hotels are a focus, especially in light of the recently passed federal transportation bill, which is expected to boost demand. The luxury and ultra-luxury segments remain strong and resilient and appear to be immune to interest rate fluctuations. These luxury real estate investors are also exploring opportunities outside of the traditional hotel market, emphasizing experiences rather than mere accommodation.
lack of new supply
A notable trend in the hospitality industry is the lack of new ground supply. Financing new construction projects has become extremely challenging as lenders have shown greater interest in financing renovations. Renovation projects can provide an immediate return on investment compared to staged developments. This trend is reshaping the competitive landscape, with established properties enjoying significant advantages.
The role of artificial intelligence
Artificial intelligence (AI) is expected to transform the hospitality industry by 2024. Artificial intelligence, previously a topic of theoretical discussion, is now being actively used in reservations and customer service operations. Top hotel operators are adopting artificial intelligence as a tool to streamline operations, reduce labor costs and alleviate labor shortages. These advancements are critical to ensuring an efficient and seamless customer experience in an era of ever-increasing customer expectations.
Overall, the hotel industry faces a complex but promising outlook in 2024, characterized by positive expectations, rapidly changing market dynamics and technological advancements. Real estate professionals should pay close attention to these trends in order to make informed decisions in this ever-evolving industry. Despite the challenges, the hospitality industry remains resilient and adaptable, with continued growth and recovery expected in the second half of 2024 and 2025.
Story written by D. Michael Daniel Jr. (MAI), national collaborative practice leader for Integra Realty Resources’ (IRR) Hotels and Hospitality Practice Group.
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