According a recent report from LW Hospitality Advisors, the situation with today’s global travel sector, which many characterize as being “on the brink of collapse,” is simply unprecedented. Seven months into a worldwide pandemic that shows no sign of abating anytime soon caused a swift, wide, and deep economic recession that has decimated key travel- and leisure-related industries including airlines, car rentals, cruise lines, ride sharing and tour operators. While stock markets have rebounded to near-record levels, the U.S. lodging industry continues to experience crippling stress as travel demand, which has experienced a sharp and sustained decline, continues to significantly lag pre-pandemic levels. Although most segments of lodging demand came to an abrupt halt during the COVID-19 crisis, hotels located in urban markets, particularly group and meeting/convention-oriented properties, have been most negatively impacted and will likely take the longest time to recover.
Human behavioral and consumer patterns have changed as many are not eager to enter closed environments such as conference rooms with re-circulated air, and no owner or hotel company has a playbook for what has been and looks like will continue to be a prolonged near-shutdown of travel. The onset of the COVID-19 pandemic earlier this year has resulted in a reset in hotel property values. Many market participants are struggling to determine an applicable discount to pre-COVID levels. Third-quarter 2020 was the second consecutive quarter during which U.S. hotel market transaction activity remained anemic with a relatively wide bid ask spread. Sellers have expressed willingness to consider a 10%-15% discount to pre-COVID pricing, while buyers are interested in transacting at a 20%-40% reduction to pre-COVID values. Price discovery will only be clarified once an active hotel transaction market reemerges.
Long-term opportunistic investors that bet big, at the right basis, and early in the cycle will likely reap tremendous financial rewards, particularly contrarian sponsors who acquire large urban corporate and group meeting/convention hotels at a fraction of their replacement cost. I think it is fair to say that in the not-too-distant future, well-capitalized opportunistic participants in the U.S. hotel industry will generate outsized returns by acquiring and investing in loans, assets and operating companies at historically low prices.