Hi guys
Any thoughts on Hotel investing as a career, its prospects relative to other assets in RE (i.e. resi, commercial). Has the business become harder / more saturated more recently? Covid has not unlocked opportunities one would hope in the space?
Importantly, is it a good way to make money - i.e. how do economics look when starting your own fund, and how easy is it to get a hotel fund off the ground relative to other RE strategies?
Thanks!
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Hey there!
Hotel investing can indeed be an exciting career path. It's a unique asset class within real estate that offers a variety of opportunities. Here are a few reasons why it can be interesting:
1) Variety of Properties: Hotels come in all shapes and sizes, from different brands and flags to varying styles and levels of service. This diversity can make the field quite engaging.
2) Operations-Intensive: Hotels are very operations-intensive, and the cost of operations can vary significantly between a basic hotel and a full-service hotel. This aspect can provide a lot of learning opportunities and challenges.
3) Unique Drivers of Occupancy: Hotel occupancy can be influenced by factors much different than other asset classes. For example, in major cities, convention schedules can significantly impact occupancy rates.
However, it's important to note that the hotel industry can also be challenging. It's a business where you're essentially running a restaurant that people sleep at. Employees can be unpredictable, and the returns can sometimes be better elsewhere for less work.
As for starting your own fund, it's not an easy task, regardless of the real estate strategy. It requires a deep understanding of the market, strong networking skills, and a solid track record.
In terms of the impact of COVID-19, it has indeed created some challenges in the hotel industry. However, with every challenge comes opportunity. It's all about how you navigate these changes and adapt to the new normal.
Remember, every asset class has its pros and cons, and what matters most is your interest and passion for the field. If you're genuinely interested in hotels, then it could be a great fit for you!
Hope this helps, and best of luck with your career decisions!
Sources: Why Hotels?, Why invest in real estate rather than the stock market?
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I’ll bite. I’m not a hotel expert.
Is hotel a harder business these days?
- I think you need to understand the difference between limited service hotels (your Holiday Inns) and the full service hotels. A keep business model difference is labor. Goal of limited service is to employ fewer FTE’s (Full Time Equivalents).
I don’t think getting into the limited service hotel game is that difficult relative to other asset classes. You are developing a (cookie cutter) multifamily building usually in a commercial area. Hotel tends to have the highest development yields (relative to other uses office or industrial), so if there is demand (ie near an airport), then the yields could help you acquire land. This process however over time, has made the market more saturated.
I know a guy who amassed a $100MM limited service portfolio, but lost it all during the Great Recession. He went from India, to engineer in the US, to slum lord apartment owner to hotel developer. He bounced back (great guy).
The full service hotel side?
I’m from Hawaii, so hotels/resorts was an inspiration for me getting into CRE. I dabbled in hotel development but did not do it.
I have a friend who works at Replay Destinations - they build resorts in ski areas, near landmarks, and in Hawaii and international. Google the founder’s path.
I have several friends in the hotel industry.
I think it can be really exciting, developing / creating experiences for people looking to escape their realities at home. That mission permeates clearly as an operator, but also developer, acquisitions, investor.
Historically, resort is very risky (expensive to build, operate). There’s a saying, the person making the money in resort is the group that buys the resort from the developer for Pennies on the dollar.
Limited service hotels are supposed to be less ambitious and risky.
Looking forward?
Traveling is such a part of being human that travel picked up after the COVID restrictions lifted, in many places (Hawaii, look at Japan with some of the strictest restrictions on foreign entry, once lifted has record breaking tourism). On the flip side, San Francisco’s convention hotel business hasn’t yet recovered. I’m sure there are other cities who are winning and losing.
The reality is:
- costs are up
- rates need to go up (some places they can)
- capital is seeking returns relative to other investments, and hotel tends to get higher development yields relative to other assets (if demand is there)
- humans travel and I don’t see that subsiding
For a career that takes you to beautiful places in the world (particularly for full service folks), I think it can be a great career. Don’t let the macro environment get you down. Your future career will see ups and downs, but if you want to create amazing experiences for people, and hone your real estate skillset, it’s a great sector.
There’s also cool hospitality proptech mashups. AirBnB being the most well know, VRBO; Placemakr, also super limited service hotels (no front desk, they send you a code to your phone). All kinds of variations. Glamping.
Thanks for sharing, very cool insight. I'd love to get into hotels and companies like AMAN, etc..
Do you have any additional thoughts on the ultra-luxury side of full service hotels? Its ok if not :)
Adding on,
In my opinion, I think the Big Box (300+ rooms) Full Service hotels in the middle of big CBDs is pretty much dead at the moment. @odog808 mentioned above, I believe the Hilton San Fran just defaulted.
Moving forward, places like Chicago, San Fran, and Portland business travel are probably going to struggle to come back for the time being, but other markets like New York seem to be completely recovered. Although I think leisure travel to these markets in the summer never seem to slow down but that’s just what I’ve seen.
One thing to consider is the brands, and their appetite to put more rooms online and how much they’ll require in their PIPs. A lot of owners are getting crushed by the increasing PIP costs because most of them didn’t have to renovate during COVID. I’ve seen these costs increase by 150% depending on the age and condition of the property, it also hurts new buyers when you are required to do a change of ownership PIP.
Like it was mentioned above, Hotels are great, just make sure you’re working with people who know what they’re doing.
Big box hotels in CBD may make a comeback if other cities regulate Airbnbs like NYC is doing.
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