Jessica Jahns, Head of Pan-EMEA Hotels & Hospitality Research, JLL.
It is no secret that urban hotels were the most negatively impacted in the immediate aftermath of Covid-19 driven by widespread travel restrictions, the closure of most tourist attractions, and a lack of both business and group travel. RevPAR in many of the world’s largest cities declined by as much as 80%, with some reporting occupancies in the single digits. Now, nearly four years past the initial pandemic shock, urban hotel performance has soared, underpinned by the reopening of international borders and the return of group and business demand.
London has seen a surge in both inbound international and domestic European travel, benefitting from the weaker British Pound which continues to attract both tourists and investors alike. London RevPAR grew 19% in 2023 relative to 2019 driven by historic ADR as hotel operators continued to navigate high inflation. Look for the market’s occupancy, which still lags 2019 by 3 percentage points, to accelerate in 2024 and drive RevPAR even higher. This should fuel hotel investment volume which closed 2023 at a mere $867.8 million, down 64% from historical averages. Expect impending loan maturities and deferred capex to catalyze transactions in 2024, with the luxury sector likely to be the largest recipient of capital.
International travel to fuel urban market hotel performance & liquidity
The impact of international travel on urban hotel demand cannot be understated. Historically, there has been a 90% correlation between inbound foreign arrivals and urban hotel occupancy, particularly in gateway markets. As such, with all borders now reopen, expect to see a surge in urban hotel performance. Europe will likely be the largest beneficiary as it prepares for the Summer Olympics in Paris and welcomes Taylor Swift’s Eras Tour, with over 50 dates scheduled across Europe from May.
This acceleration in international travel should not only strengthen urban hotel performance but should also lead to growth in cross-border hotel investment which has been largely absent since the onset of Covid. From 2010-19, foreign hotel investment accounted for an annual average of 22% of total global hotel investment volume. This has shrunk to only 12% over the past three years as many global investors have been pushed to the sidelines due to geopolitical instability and fears of a global recession. While volatility persists, look for cash-rich, low-leverage investors to drive cross-border capital led by sovereign wealth funds, HNWIs, and family offices. Expect Middle Eastern and Asian investors to be the most acquisitive, with urban markets in Europe and select U.S. cities to be the largest beneficiaries. Look for Africa and India to be selectively targeted by European and Asian investors as major hotel brands expand into these markets.
Urban liquidity to drive global hotel investment volume
The improvement in urban hotel performance has translated to a renewed investor optimism in these markets. In the ten years prior to Covid, urban markets accounted for an annual average of 61% of single-asset global hotel liquidity. This dropped precipitously in 2021 & 2022 but has started to reemerge as of late accounting for 49% of single-asset liquidity in 2023. Pricing has also strengthened, with urban single-asset price per key reaching $301,000 in 2023 an increase of 6% relative to last year. While still 8% behind 2019 levels, this growth should fuel more dispositions as owners look to exit their investments.
In comparison, urban hotels in Europe accounted for 65% of single-asset liquidity in 2023. Unlike the global picture however, price per key in urban hotels across all segments has reported three consecutive years of decline to close last year at $266,000, $94 below the previous peak set in 2020. This provides investors with opportunities to acquire quality hotel assets at relative discounts driven by volatile debt markets and high costs of capital, similar to what urban U.S. markets reported in 2022.
Look for investors to inject increased capital into markets such as Geneva, London, Paris, and Rome. Foreign investors, private equity, and HNWIs will likely be the most acquisitive in the short-to-medium term as cost of capital remains high.
Reshaping the urban market
Looking to the future, flexibility will be crucial for urban hotels to navigate the changing landscape. As the lines between living, working, and playing continue to blur, hotels that design spaces that can be easily reconfigured or repurposed, such as flexible meeting rooms that can convert into co-working areas, will have an advantage. Adapting to new trends, technologies, and consumer preferences will be key to staying competitive. As urban development costs rise, hotel developers may explore more innovative and cost-effective construction techniques, such as modular or prefab construction. Further, look for hotels to become increasingly integrated into urban mixed-use developments to help mitigate risk and maximize revenue capture. By integrating multiple uses within a single development, investors can diversify revenue streams and create more sustainable urban environments. Cities that have a concerted effort towards intentional tourism, with a focus on technology, will ultimately garner the most long-term investor interest.