What Can Institutional Managers’ Investment Activities Tell us About the Recovery


It is no secret that hospitality has suffered a fair deal in the wake of the COVID-19 pandemic. Plagued by capacity restrictions, annual traffic at TSA checkpoints plummeting by close to 60% from 2019 levels, along with significant curbing of business travel, the industry as a whole has fallen victim to low occupancy rates and a reduction in attention from the investment community.

As investors and lenders evaluate their portfolios and risks in the wake of the pandemic, uncertainty persists, casting particular attention to the importance of cash management surrounding hospitality assets. In response, many recent loan modifications require that borrowers establish a debt service reserve, along with substantial principal paydowns, to cover for unanticipated shortfalls in cash flow. Similar risk mitigation tactics are also present with new loan originations, further signaling uncertainty.

The degree of severity and likelihood of a recovery for this asset class is surprisingly inconsistent. According to data published by Reonomy in their recent report “Big Money: Portfolio Insights from Institutional Managers,” which takes a look at 35 major institutional real estate owners and their recent investment activities, the factors most heavily influencing the divergent nature of this asset type are both geography and classification (i.e. luxury vs. economy).

What large investors tell us about appetite for hospitality and valuations
On average, major investors, comprising real estate focused managers, alternative investment managers, bank affiliates, insurer affiliates and residential specialists, with significant portfolios of at least $1 billion of US commercial property owned at year end 2020, invested only $3.82 out of every $100 into hospitality—down from $8.59 invested in this property type in 2019.

Put into perspective, large investors allocated approximately $26.70 out of every $100 into multifamily and a whopping $42.60 out of every $100 into office at a time when corporate America saw unprecedented office closures.

When sliced another way, a different narrative emerges. The average price paid by large investors toward hospitality was $85 per square foot, down 59% from the previous year, suggesting a shift in preferences from full-service to more budget and economy opportunities in the space.

Recent analysis from a CBRE report provides additional color to the state of luxury hospitality assets, highlighting that closures for luxury hotels at the end of Q1 2021 landed at 16%, while the “closure rate of all hotel properties stood at just 4.6% during the same time period.”

The relative uncertainty of the effects of COVID on Hospitality, specifically in luxury hospitality assets, has made it difficult to assign property valuations to properties. This is a challenge experienced by both…

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