Gilda Perez-Alvarado is the global CEO of JLL Hotels & Hospitality, where she is responsible for investment sales, debt and equity placement, strategic advisory and asset management.
She shares her thoughts on the hospitality real estate market ahead of her participation to the International Hospitality Investment Forum (IHIF) on 1-3 September in Berlin.
Hospitality Insights: What makes hospitality real estate a strong investment opportunity despite the very difficult time the market is going through?
Gilda Perez-Alvarado: Hospitality real estate presents a strong investment opportunity because it has defining characteristics that are unique to the sector. Unlike other properties, hotel owners can adjust room rates on a daily basis allowing for revenue potential to be maximized, while also serving as a hedge against inflation. This quality alone has allowed the sector to achieve some of the highest income returns across all global regions.
Moreover, lodging demand is highly correlated to GDP and as such, when there is strong economic growth, the industry tends to be one of the first to recover. Currently, private equity investors have a plethora of capital on hand given higher allocations towards real estate and alternatives from institutional investors worldwide who are chasing higher investment yields. . When we look at previous economic cycles, hotel yields have consistently outpaced other real estate property sectors, making them an attractive investment.
Hospitality Insights: The pandemic has had a strong impact on the relations between operators, owners, lenders and all stakeholders in hospitality. What do you expect to be the lasting effect of this change?
Perez-Alvarado: Expect to see more collaboration among all stakeholders in hospitality. In conversations with major brands and hotel owners, we’ve learned that brands have relaxed some of their brand standards during the pandemic and have allowed owners to leverage FF&E reserves to support cash flows. Major hotel parent brand companies are also exploring how to make management and franchise agreements more flexible as a way to better accommodate the unique operational challenges different hotel owners face across different markets. Additionally, we’ve seen lenders across all regions grant loan modifications or forbearance extensions to provide some level of relief to owners.
Hospitality Insights: There is much talk of consolidation in hospitality, what are your expectations?
Perez-Alvarado: Covid-19 had an immediate and drastic impact on hotel revenues and occupancy rates as it created an extremely challenging operating environment. Smaller hotel companies with fewer resources will have a difficult time holding on to their assets despite generous government stimulus packages and schemes. Moreover, technology is becoming increasingly important in hospitality and scale and leverage is required to make the appropriate investment (just think about the scale of Airbnb versus the top five global hotel companies). Lastly, with so much capital on the sidelines, larger deals are becoming more attractive, which is a great trigger for traditional M&A.
Hospitality Insights: Which regions do you expect will lead in terms of number and size of transactions in 2021 and beyond?
Perez-Alvarado: In 2021, we are learning that the distribution of vaccines is defining the recovery profile across all markets. As such, those destinations that achieve the most success in inoculating a greater proportion of the population and that benefit from strong domestic demand, will see higher levels of lodging demand. In turn, investors will gravitate to markets that appear to have more demand certainty and whose recovery timelines have been accelerated due to widespread vaccinations. This will naturally translate to greater momentum on the hotel investment front. With this in mind, we expect the U.S. to lead in terms of number and size of transactions.
If Europe can quickly surpass the most recent surge of Covid-19 cases and expedite vaccinations across the region, it will see greater investment activity as well. In Asia Pacific, more limited transaction activity is anticipated as Asian hotel owners are generally not under pressure to sell. Hotel owners in the region are prioritizing renovations and operational investments that will enable them to respond to changing consumer preferences and advancements in technology brought on by the pandemic.
Hospitality Insights: Has the Covid crisis had an impact on the segments hospitality investors are looking to expand into?
Perez-Alvarado: Investors are keen on acquiring assets that will be the first to recover. With leisure demand driving the first wave of the lodging industry’s recovery, assets situated in resort markets and in less dense locations are garnering significant investor interest given recent shifts in travel preferences. As the demand recovery becomes more pronounced, we will also see investment interest pick-up for high-quality assets situated in urban markets that become available for sale at an attractive basis. These prices may be too appealing for a well-capitalized investor, with a long-term investment horizon, to pass up.
Extended-stay hotels are in favour as evidenced by Blackstone Real Estate Partners and Starwood Capital Group’s announcement surrounding their $6.0 billion acquisition of Extended Stay of America. These types of hotels not only feature learner operating models but also are a product that consumers have shifted to during the pandemic as they feature larger rooms and fully equipped kitchens. Investors are also eager to acquire trophy assets that rarely come to market.
Moreover, evolving lifestyle changes brought on by Covid-19 have fuelled the popularity of luxury branded residences, which has accelerated growth of luxury branded residential products. In fact, Four Seasons, announced earlier this year that 90% of its upcoming openings and pipeline developments include a residential component.
Hospitality Insights: The leisure segment is hailed to be driving hospitality recovery. What are the keys to succeed in this market?
Perez-Alvarado: Leisure travel proved to be a stronger segment of demand throughout the pandemic as travellers experienced lockdown fatigue and planned ‘last minute’ trips, escaping to drive-to destinations. When consumers slowly started traveling during the pandemic, it became clear that they favoured larger, individual, and private accommodations to comfortably stay for longer periods of time and work productively. To continue succeeding in this segment, hotels will need to ensure consumers’ cleaning and sanitation standards are met, that the travel experience is more seamless through the use of technology and that they have plenty of personal space in their rooms and in common areas.
Hospitality Insights: The corporate segment is expected to come back later than leisure. How do you see this segment recovering?
Perez-Alvarado: Countries that have been successful in launching vaccination programs are seeing an immediate impact on consumer travel sentiment and lodging demand. As such, in these markets we could see corporate domestic travel return quicker than originally expected. This dynamic coupled with the technological advancements many hotel operators have invested in to appropriately host hybrid meetings and “meeting bubbles” will help boost business travel. Even with an increasing proportion of the workforce expected to have flexible working arrangements, business travellers will want to meet in-person with clients, making hotels the perfect place to meet or stay.
Hospitality Insights: Have the ESG requirements from customers and partners changed in the past year? What recommendations are you offering to improve sustainability and inclusion in particular?
Perez-Alvarado: One of the silver linings of the pandemic has been the whitespace we’ve all had to reflect on life, work, and the impact we each have on the world. As a result, consumers, investors, and partners are placing greater focus and becoming more aware of the values that guide how companies are conducting business. Collectively, all stakeholders are leveraging their purchasing power to effect change from the products they purchase to the built environment they choose to invest in.
To improve sustainability across the real estate industry we need to demonstrate the value that responsible buildings create for investors. JLL is currently working on an index to help quantify the premium/discount responsible real estate assets can trade at. Regarding inclusion, we need to redefine the workplace to be more equitable and inclusive for all employees. We can start by abandoning office facetime expectations, offering more flexible working arrangements for caregivers, and providing financial assistance for child support.
Hospitality Insights: What are your looking forward to with regards to your participation to IHIF?
I am excited to hear about how the last 12 months have shifted corporate strategy and priorities, as well as where investors see innovation taking place.
Gilda Perez-Alvarado will be moderating the investors panel at IHIF on Wednesday 1st September. Find out me about the programme here.