Hotels that serve vacationers, weekend travelers and day trippers are performing very well—in some cases charging higher daily rates and filling more rooms than prior to the pandemic. That strong performance is making leisure hotels more attractive to investors, helping thaw an investment sales market that had nearly completely frozen during the depths of the pandemic.
“We have seen the most lift in hotels that are easy to access via car from large cities, such as locations across Florida, Maine, the Carolinas and southern California,” says Chris Devine, chief financial officer for Pyramid Hotel Group, headquartered in Boston. “Pyramid has pursued far more deals with partners in markets like Nashville, Charleston, Savannah and coastal Florida than we have in major gateway markets this past year.”
Investors are still spending much less to buy hotel properties than they did before the pandemic. Most hotel owners are still unwilling to sell at a discount unless they absolutely have to.
Investors paid a total of $1.0 billion to buy hotel properties of all types in May 2021, according to Real Capital Analytics. That’s close to six times (589 percent) the amount of money they spent in May 2020, in the midst of the pandemic. But it’s still far from normal. In the first part of this year, from January through May 2021, hotel investors spent a total of $9.1 billion—down 39 percent from the average they spent over the same months in the years 2015 to 2019, before the pandemic.
Investors are doing more deals—but still much less than normal—to buy limited service hotels, which suffered less during the pandemic, in part because they did not have restaurants or meeting spaces that had to close during the pandemic. From January to May 2021, they spent $4.2 billion on these hotels. That’s 23 percent less than the average they spent over these months in the years 2015 to 2019.
But a growing number of buyers and sellers are coming together to trade a particular kind of hotel, serving vacation travelers and day-trippers in leisure destinations like beach towns or mountain villages within day-trip driving distance of major metropolitan areas.
“Both the Four Seasons hotel in Orlando at Disney World and Montage Healdsburg [located in the Sonoma County wine country near San Francisco] traded at low cap rates,” says Jan Freitag, national director of hospitality analytics and senior vice president for CoStar.
Another leisure hotel, the Chateau Mar Beach Resort, a 51-room, contemporary boutique hotel located in Ormond Beach, Fla., also recently sold at a competitive price. The freshly-renovated hotel, first built in 1968, re-opened in May 2020 during the pandemic. “Chateau Mar’s oceanfront location was a major point of interest from buyers who were hoping to capitalize on vacationers in the Southeast United States looking to escape potential for exposure to COVID in denser, urban areas,” according to Colliers, which facilitated to sale to undisclosed buyers.
Leisure hotels like these are filling more rooms and charging higher room rates than hotels overall. Many are performing even better than they did in 2019, says Colliers’ Zaver.
"The recovery in the U.S. hotel industry is leisure-driven," says Freitag. “We can see this in higher weekend occupancies and higher occupancies in resort locations, versus urban locations.” Successful vaccinations against the coronavirus and over $2 trillion in additional savings throughout the last year have given American consumers the means to travel, he says. Consumers are also flying again, according to recent weekend data from the federal Transit Safety Administration. "We expect that room demand this summer will be robust."
Some buyers worry the strong income earned by leisure hotels might not last through the winter—that prevents even the highest performing hotels from selling at prices much higher than 2019 levels. “Your demand drivers will change later on in the year,” says Zaver. “You will see more corporate demand for travel—and the school travel will slow down, the leisure travel will slow down.”
Prices are still relatively high, however, both for leisure hotels and hotel properties overall—down just 0.1 percent in May compared to the year before, according to RCA’s Commercial Property Price Index for hotel properties.
Hotel owners are generally not willing sell at a discount to what they would have sold for before the pandemic.
Even hotels that can show strong income, like leisure hotels, might not be available for investors to buy. “Because the business has been good, why would the owner want to sell?” says Zaver. “It is the lack of having much inventory on the market that has been pushing prices higher.”
More and more deals are getting done, in those case where a buyer finds an interested seller with a well-performing hotel property. Financing is also now available. Earlier in the pandemic, hotel investors were often unable to find conventional financing had to rely of loans from the Small Business Loan Administration (SBA) programs, which only worked for smaller deals. Conventional lenders now offer acquisition loans that cover 50 percent to 55 percent of the value of the property, according to bank underwriters. “That’s down from 70 percent, before the pandemic,” says Zaver.
Even more deals may get done in fall, as some hotels that have fallen behind in their loan payments are seized and sold by lenders.