A recent webinar from Marcus & Millichap noted investment interest in commercial real estate—including the hotel industry—remains high as worries of a downturn grow.
REPORT FROM U.S.—The hotel industry is still viewed as high-risk, high-yield for broad commercial real estate investors, according to a webinar by brokerage firm Marcus & Millichap.
The webinar, which looked at the real estate investment dynamics heading into an expected downturn, noted there are still several opportunity for investors, with many spurred on to make new investments by recent changes in tax law.
“Commercial real estate in the U.S. and Canada stands out as a compelling investment choice,” said company President and CEO Hessam Nadji. “Especially as the two time bombs seen in every cycle for the last 30 to 40 years—overbuilding, overleveraging or a combination of the two—are not present in the current marketplace.”
Hotels remain attractive
Hoteliers tend to worry a lot about the potential of supply growth, but John Chang, SVP for research services, said it’s important to note hotels are enjoying all-time highs in terms of occupancy.
Hotels “are doing fantastic,” he said. “More business travel and tourism travel is boosting the demand for hotels. Some supply risk emerged causing some caution (in the sector), but supply didn’t keep pace with demand.”
He said the investment appetite in the sector remains strong.
“We’re seeing a lot of investment into higher-yield opportunities, especially with well-branded hotels,” he said.
A lot of that interest is new investors entering the sector, coming from other forms of real estate.
“There is some caution on the economic risk, since these turn over every day, but overall the operations (at hotels) are the best we’ve ever seen,” he said.
Overall real estate is also in an especially long cycle
Hoteliers are wondering how long the exceptionally long upcycle can continue, and that concern seems to be held across all commercial real estate types, Nadji noted.
“This is the second-longest expansion we’ve seen since the 1950s with the chance of becoming the longest on record,” he said.
But he noted the continued low-interest-rate environment bodes well for real estate investment, despite the cycle growing shockingly long in the tooth.
“The most common culprit (heading into a recession) is to elevate interest rates, but that’s not been alarming,” he said. “In fact, it’s been fairly muted.”
Lenders may be the heroes of the cycle
As Nadji noted, overgrowth of supply is often a harbinger of bad things for the various real estate sectors, but Chang said a disciplined lending environment has kept things from overheating.
“Lending has tightened and reduced risk in the growth cycle, with construction loans in particular having tightened substantially,” he said.
At the same time, banks have remained active, albeit disciplined, with “capital broadly available from numerous sources.”
Strong employment is good for hotels
Given that hotels are more sensitive to the economic climate than other forms of commercial real estate, like apartments or offices, hoteliers should take solace in the continued strong labor environment, even if it means finding employees is difficult and expensive.
Chang said the current low employment rate is a boon for travel and for the usage of self-storage.
Those sectors “are in a good position economically and balance sheets have strengthened dramatically,” he said.