Prospects for commercial real estate are quickly improving after a challenging year. But the market that’s emerging from the COVID-19 pandemic is permanently changed. This is especially true of the hard-hit hospitality industry.
Hotel assets were the property type most deeply affected by the pandemic. Last year was the worst one on record for U.S. hotels as the occupancy rate dropped to 44% and revenues were nearly cut in half, according to STR. In recent months, with the health crisis easing, the fortunes of hotels have rebounded significantly, but the industry as a whole has had to adapt.
Social distancing and travel restrictions have forced hotel owners to reimagine the hospitality experience, and to adopt new technology to reassure and attract guests. Travelers no longer necessarily want to stay in downtown areas. People have been moving away from big cities and need a temporary place to stay. Meanwhile, technology platforms are making it easier for multifamily and hotel owners to rent rooms for short-term stays using mobile apps. These properties are now able to draw from a wider pool of guests.
For commercial mortgage brokers, it is worth staying on top of the ways in which the short-term rental market is changing. Lenders are certainly paying attention to any trends that might improve an asset’s performance and lower the risk associated with a hotel loan.
Adopting technology
Although traditionally slow to adopt new technology, hotels hurried at the start of the pandemic to offer solutions that comply with social-distancing requirements and reassure guests. Contactless technologies, such as remote check-in services, keyless entries and virtual concierge service, will likely endure after COVID-19 dissipates. Not only do these tech tools reduce a hotel’s overhead costs, but many consumers have come to expect these conveniences.
The typical hotel guest has already grown accustomed to using on-demand apps such as Uber and Postmates, so they were ready for these changes. They will continue to expect the convenience and privacy of apps in more areas of their lives, including researching and booking where they vacation and stay. Whether it is to create a keyless entry to a hotel or to book a stay in a nontraditional setting, properties that offer convenience via apps will appeal to investors, tenants and travelers alike.
Consumers were using apps to find and book places to stay prior to COVID-19, but the pandemic accelerated this trend. As consumers sought privacy and social distancing in the past year, more people looked for options beyond traditional hotels. People are booking rooms away from downtowns and typical tourist areas. Phone apps can make this process much easier.
The pandemic also has changed the operational and business models for some hotels and multifamily properties. Some traditional hotels have been converted into multifamily units. Some apartment buildings are being converted into short-term rental units that cater both to vacationers and to people who are moving into cities.
Many apartment renters are looking for more flexibility with leases and for hotel-style amenities. Hotel owners can convert underperforming assets into short-term, leased apartments that cater to people who are moving into an area. Meanwhile, many travelers and vacationers may not want to stay in the downtown core where hotels are typically built but prefer to rent a room short term in an outlying neighborhood. Technology-based management services can easily automate the process.
For many, this means discovering new cities and towns. A savvy marketing strategy that goes beyond touting a property to showcase its neighborhood can attract both tenants and travelers. Adopting a marketing plan that highlights local restaurants, parks, performing arts centers and children’s museums, among other things, can draw in newcomers to the area.
A savvy marketing strategy that goes beyond touting a property to showcase its neighborhood can attract both tenants and travelers.
Selling neighborhoods
As with hotels, multifamily properties are expected to rebound in 2021 after a down year. In many areas of the country, soaring prices for single-family homes and a lack of available inventory will boost the rental-housing market. Demand for properties in the South and Southwest will be particularly strong given the large number of people moving to these regions.
When evaluating properties to finance, or with upgrades to existing multifamily properties, it is crucial to keep two key considerations in mind: technology and flexibility. These components add value to commercial real estate by capitalizing on post-pandemic shifts in how and where Americans live, work and travel.
Of course, changes in how many Americans work most directly affects the office sector, where there remains some long-term uncertainty. But the widespread acceptance of remote work — which appears to be outlasting the pandemic — has increased demand for hotels and apartments outside of major cities. It has led many people to explore living in more affordable areas, accelerating an existing trend to move out of big cities, according to a May 2021 report in The Wall Street Journal. Nationwide, relocations from large metro areas to midsized and small ones rose by 23% last year.
To be sure, there is still uncertainty about the course of the pandemic and the recovery of the job market. These circumstances will impact how quickly vacancy rates, rents and investments in commercial real estate will rebound. As the industry revives post-pandemic, however, the market is clearly changing. After years of putting technology on the back burner, innovation has picked up. Investors are pouring funds into tech-enabled solutions and properties.
Here are two examples. After launching in October 2020, Pacaso, a startup that enables people to become part owners in second homes, was able to raise $75 million. And in a signal of the importance of innovation to the industry’s future, online travel agency Kayak entered a partnership to open a tech-forward hotel in Miami.
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Consumers are increasingly expecting the ease and privacy of phone apps. The rise of remote working means that more people are traveling and moving to areas they hadn’t considered prior to the pandemic. By offering mobile apps and flexible stays, and by pitching their neighborhoods as well as their assets, property owners can take advantage of trends as the commercial mortgage industry rebounds. ●
