While it is common to hear hotel investors refer to “THE” hotel real estate or market cycle, there are many distinct types of interdependent cycles that affect hotel investment performance and the success of a cycle strategy.
Within a multidimensional framework of intersecting cycles, the hotel asset manager can better assist investors to achieve their investment objectives. The development of an investment strategy that addresses multiple interrelated cycles is therefore more likely to meet an investor’s most ambitious goals.
We routinely address at least eight cycles in our transaction and asset management advisory services, including debt/equity, operating expense, supply, demand, occupancy, and capital expenditure.
Tracking, comprehending, and acting upon multiple interrelated cycles is a daunting undertaking, however. To help in the challenge, a few fundamental principles are listed for hotel investors:
1. Identify the critical cycles and focus on those that are likely to have the greatest impact on occupancy, ADR, RevPAR, cap rates, and hotel values.
2. Explicitly identify the hotel’s location on the continuum for each critical cycle and research their effects on investment variables. Investors need to understand the relationship between these key cycles and cash flow variables that affect rates of return and risk parameters. They also need to act upon the leads and lags that characterize these relationships.
3. Develop a hotel investment strategy that takes advantage of cycles. Investors need to measure the impact of each cycle on cashflows, IRRs, and risk parameters under different acquisition/disposition and market/economic scenarios, then act accordingly to achieve their investment objectives and reach their most ambitious goals
Understanding where a hotel is located in risk and return space requires pinpointing where the hotel is located along the continuum of critical cycles. We have found that explicitly and systematically incorporating hotel real estate cycles in hotel investment analysis has led to better investment decisions.
Ross Woods is a seasoned hotel investment advisor with over 30 years of global experience in hotel asset management, portfolio management, and hotel advisory services. Known for his collaborative-based consulting style that integrates a high level of strategic and analytical expertise, his “smarts” are sought by clients to solve complex issues, make better decisions and realize the highest risk-adjusted investment returns. His clients include banks, private investors, REITs and hotel management companies in the United States, South East Asia, Australasia, Europe, and Dubai.