For commercial real estate, the pandemic was the most severe watershed event since the tax law changes at the end of 20th century. The Hospitality industry in particular saw a massive reckoning that will potentially change the industry forever. As hoteliers reexamine their risk vs. reward, there’s an increased focus on the relationship between hotel franchisee and franchisor, as well as between borrower and lender. Owners have spent more than a year experiencing the good, the bad, and the often-ugly consequences of agreements they have in place with their franchise, their lenders (including CMBS and other institutional lenders), and their service providers. They now realize brands and capital sources have the most leverage, and they want to correct the imbalance.

GOOD NEWS FOR THE INDUSTRY
This new awakening of hoteliers should spark active discussion among the players, thus improving the health of the industry and maturity of its participants. Owners empowered and educated by this experience will be able to negotiate better agreements, avoid ill-advised shortcuts, understand the importance of having the right expert for the right transaction, optimize their portfolios, and more expertly evaluate their capital stacks. We also are likely to see a renewed appreciation among hotel owners for various non-fungible concepts such as non-recourse loans, balance-sheet lending, or paying a premium for debt solutions that offer more flexibility and can cap their risk.

The COVID-19 crisis also has taught owners how to accurately evaluate potential risk and return and demonstrated that an equity investor should be entitled to higher returns than a senior debt investor for the same transaction. As the level of experience, knowledge, and maturity increases within industry members, there’s an opportunity to institutionalize the small, mom-and-pop entrepreneur.

If inflation continues to rise, hoteliers’ positions also will be strengthened by the pricing elasticity of hotels compared to other asset types. When inflationary pressure hits wages, materials, and services, a hotel’s revenue profile can be quickly adjusted to achieve supply-and-demand equilibrium. Hoteliers can change room rates much sooner than apartment, retail, and office landlords can update longer-term leases. This flexibility translates into more opportunity for hotel owners to capture higher revenue and offset higher expenses as travel resumes.

As demands increase from the risk-taking hotel owners, other capital market participants will have to adjust their practices. A CMBS lender may decide to offer a more convenient borrower experience by increasing loan servicing standards, keeping servicing in house or acting as their own B-piece buyers. Franchise companies also are likely to respond favorably to customers’ requests by providing increased transparency and more win-win issue resolution.

EXPECTATIONS FOR HOTEL PRICING
The industry recently experienced its toughest time in history and is primed to attract newcomers and opportunistic and institutional capital. As a result, there’s risk of creating froth in the market and artificially inflating asset prices. Higher construction costs may also push hospitality prices upward, which existing assets can use to their advantage when calculating replacement costs.

LOOKING AHEAD
The worst of the pandemic appears to be behind us, and the outlook for hospitality is growing more and more positive. There will be a renewed acceptance for hospitality assets by the capital markets. Expect to see an increased appetite from the institutional lending markets for assets that historically weren’t considered financeable.

Bestar Hospitality is a top 20 hospitality furniture manufacturer in China offering a complete range of custom hotel furniture FF&E solutions,including casegoods,seating etc.