Discovering hotel real estate: a comprehensive guide

Quick facts

→ Hotel real estate is vital for the hospitality industry, serving as a significant economic sector and employment provider
→ The dynamic nature of the hotel market necessitates current data and trends for accurate future predictions and commercial opportunity identification
→ The hospitality sector is expanding into new areas such as co-living/co-working spaces, wellness facilities, and assisted living, increasing the demand for specialized real estate.
→ Effective hotel asset management involves balancing the priorities of owners, operators, and guests to maximize property value and performance

Overview of the hotel real estate industry

Definition of hotel real estate

Real estate, ‘bricks and mortar’, property… there are numerous definitions for the buildings that businesses operate in, and which encompass the commercial real estate market.

This market is divided into different segments. By far the biggest is the ‘traditional’, or ‘core’, real estate which includes offices, shopping centers, and industrial buildings such as factories and logistics hubs. Then we have so-called ‘alternative’ real estate; and in this segment you’ll find hospitality real estate occupied by businesses such as hotels and restaurants.

One of the main dividing lines between ‘traditional’ and ‘alternative’ is that the latter often incorporates an operational element – i.e. the trading success of the business has a material impact on the value of the property. This is much less true of an office, where leases are often fixed for years or even decades.

As such, investors in hotel real estate have woken up to the additional upside which can be generated by good asset management. At the same time, the major hotel chains have been switching from owning their own properties to an ‘asset light’ strategy, whereby real estate ownership is passed to a third-party investor. This has further increased the tradable real estate stock in the market

Importance of hotel real estate in the hospitality industry

Hotel real estate is a relatively small element of the wider commercial real estate market (€17 billion out of a total transaction value of €140bn in Europe in 2023) but it is undoubtedly becoming more important as investors seek alternative ways to add value to their portfolios.

In addition, the definition of ‘hospitality’ has also stretched out into new areas that go beyond its traditional base of hotels. Today, you’ll find the sector encompassing co-living and co-working spaces, specialized wellness premises and assisted living developments designed to cater for aging populations.

All of this requires quite specific real estate, further increasing the importance of real estate investors/developers in feeding appropriate buildings to operators.

Hotel market analysis

The world of hospitality is fast moving, making it vital to have the latest data and trends at your fingertips. Only then can you truly know the market, predict its future direction more accurately and, crucially, use this knowledge to identify commercial opportunities.

Conducting market research for hotel real estate

The good news for a hotel market analyst is that there is a wealth of available statistics and data to call upon.

The industry has a number of specialist data providers, including STR / CoStar , HotStats and Amadeus to name but three. There are also dedicated news and information services such as Hospitality Net and Skift, while the major commercial real estate agencies such as Cushman & Wakefield and CBRE have dedicated hospitality divisions that produce bespoke research on the hotel investment and development markets.

To this you can add high level government data on the hospitality industry, including tourism numbers and spends.

Before undertaking a hotel investment or development project it is also essential to think more deeply about the location(s) you’ve chosen. That means analyzing elements such as connectivity (how will your guests get to the hotel?), cost and ease of construction, plus political stability.

Last but not least, professional networking is also crucial to keeping your finger on the pulse. Attending industry seminars and forums can assist in this regard. And by studying a dedicated real estate degree program you will also benefit from gaining access to an alumni community of like-minded individuals.

Analyzing demand and supply factors in the hotel market

Are you certain that there will be a demand for your new hotel’s rooms and services?

To get clarity on this involves analyzing the performance of the existing hotels in the area, plus any new properties in the pipeline. This will form the competitive set against which you can benchmark your own proposal.

The good news is that there is plenty of available data to work with. You can benchmark by revenue (using data from companies such as CoStar and STR); and also profitability (through platforms such as HotStats).

Part of the analyst’s skill is to make the numbers robust and realistic, so they can stand up to challenge through processes like sensitivity analysis.

Trends and forecasts in the hotel market

Using historical trading data helps you to plot supply and demand cycles based on seasonality as well as regular ongoing events such as sporting fixtures or music festivals.

However, you must also consider the impact of major ‘one off’ events, for example a summer or winter Olympic Games; also events that occur every two or more years – the Paris Air Show and World Expo being two examples.

Last but not least, you must have an eye towards innovations and new concepts in hospitality, particularly those which are transforming guest expectations. Innovation in hospitality opens up new opportunities for you to get ‘ahead of the pack’, but it also challenges you to adapt in order to protect your existing business

Hotel ownership and operations

There are numerous different types of hotel owner, from private individuals to giant sovereign wealth funds. Here we’ll also explore some of the benefits and challenges of hotel ownership, and a few of the key points to consider before you take the plunge as a hotel owner.

The role of hotel owners in the industry

For many years, the hotel industry model was predominantly owner-operator. This was true whether referring to a standalone boutique property or the global portfolios of major brands. Even the legendary Conrad Hilton purchased his first hotel, The Mobley in Cisco, Texas, with financial help from his mother Mary, a few friends and a bank.

Today the pattern is different. The hotel may carry a brand belonging to Marriott, Accor or Hilton, but the underlying asset will most likely have a third party owner. Accor, for example, has actively pursued an asset light strategy, largely completing this process in 2019.

This shift towards asset light models has opened the door to a wide spectrum of new entrants to the hotel real estate ownership circle. Today, it’s much more common to see professional asset managers buying into operational real estate like hotels, in search of better returns.

When it comes to the top of the market, unique and celebrated hotels like the George V in Paris or The Ritz in London have tended to be acquired as ‘trophy assets’ by ultra-wealthy individuals or families, as well as sovereign entities such as the Qatar Investment Authority. The prestige they carry can allow such properties to operate to a different commercial dynamic, although trading profitably is still a prerequisite.

As ownership models have evolved, it has shifted the balance of power between the hotel real estate owners and the brands which have their name above the door. Where in the 1980s and 1990s the brands wielded all the power, today there is more balance and the owner’s needs and views are given more consideration.

This changing dynamic has also seen ever more importance attached to the role of asset manager, given that these individuals form the vital bridge between owner, operator and the General Manager & team in the property.

Benefits and challenges of hotel ownership

Hospitality is the happiness industry – what better place to invest your money than a business dedicated to delivering pleasure? It also puts you at the heart of the community: hotels and resorts employ local people, use local suppliers, and support local events by providing a place for patrons to stay.

If those are not sufficiently compelling benefits, consider also that owning a hotel can provide a relatively stable revenue stream, provided you maintain sufficient commercial discipline. And that fiscal discipline starts at the beginning: it’s vital to work out an acceptable return on investment (ROI) before undertaking a hotel investment or development project.

The challenges are that – unlike, say, an office building – a hotel is much more of a living, breathing organism, which requires hands-on management. You’ll also have to allow for regular capital investment, in areas like room refurbishment or adding facilities such as spa and wellness centers which can cater for changing consumer preferences.

You will additionally need to work out the best management structure for the property. The four main options are:

• Owner-operated – where the owner is fully responsible for the operational and financial performance of the hotel.
• Franchise – an ‘off the shelf’ solution in which the hotel owner ‘buys in’ a hotel operation as a complete package of brand, logo and operating model but manages the property himself and as such takes all the risk
• Managed – whereby the hotel owner relies upon a management company to run the business. These services can be delivered either by an established brand or a ‘white label’ management company such as Interstate Hotels & Resorts.
• Leased – in this model the owner leases the property to a corporation, chain, or individual hotel for a specified period and usually at a fixed rental amount. This is a relatively ‘hands-off’ approach for the owner, as the tenant takes responsibility for matters such as staffing, marketing, pricing, and other operational decisions.
• Hybrid formats – such as a ‘manchise’ where there is an initial management by a brand which turns into a franchise after a certain amount of time.

Hotel investments and strategies

Thinking about taking the plunge into hotel investment? Or launching a career advising others on buying hotel real estate? In this section we discuss some of the important factors you’ll need to consider.

Understanding the different types of hotel investment

• City center hotels – often catering to a mostly business-focused clientele (although hotels in cities which are major tourism destinations can also draw leisure guests), these hotels are generally larger in size and offer the reassurance of a familiar brand such as Hilton or Marriott. Recently, we’ve seen an explosion in city center ‘lifestyle’ hotels, suited to a younger demographic.
• Resort destinations – focused almost exclusively on leisure business (with some ‘bleisure’, see below) these properties are situated in international tourism hotspots, from Benidorm to Bali. Containing leisure facilities such as swimming pools, tennis courts and even golf courses, a resort destination aims to provide everything a vacationer desires without them having to leave the premises.
• Co-living/co-working spaces – pioneered by brands such as Zoku and Edyn, these premises offer flexible spaces that can be configured for longer stays, together with communal living/working areas that are especially appealing to remote/freelance workers.
• ‘Bleisure’ destinations – bleisure is the mixture of business and leisure, and it was among the trends accelerated by the pandemic, when remote or hybrid working became prominent by necessity. Typical facilities for bleisure destinations include fast internet, dedicated and comfortable working spaces, plus ‘office services’ like printing and copying.
• Hybrid destinations – also called mixed-use developments, these properties will generally combine a hotel with other real estate formats including retail and/or residential.

Factors to consider when investing in hotel real estate

A hotel investment is a long-term project, and you have to be as sure as possible that you are making the right decision before taking on such a commitment. Here are a few factors to consider before signing on the dotted line:

Mitigating risks in hotel investment

It’s not possible to eliminate all risks with a hotel investment, but there are ways to mitigate risk. The best option is to do thorough due diligence and consistently use risk management analyses at each stage of the investment/development process, as well as after your hotel has entered its operational phase.

Risk management analysis is widely used across business, commerce and government. It incorporates quantitative risk analysis, which uses mathematical models and simulations to assign numerical values to risk, and also qualitative risk analysis, where objective judgment is used to build a theoretical model of risk for a given scenario.

While unnecessary risk should always be avoided, it’s important to balance risk management with commercial considerations, and not allow risk aversion to become burdensome and stifling to innovation and strategic endeavor.

Hotel development

The alternative to buying an existing hotel is to develop your own. It’s an extremely popular choice – according to Statista Research Department there were 6,195 hotels under construction in the first quarter of 2024. The practice also forms a core element of our Master’s in Real Estate, Finance and Hotel Development – as reflected in the program’s name.

Steps involved in hotel development

These are the key steps typical to most hotel developments:

1. Feasibility and research – click here to go back to this section.
2. Financing – scroll down for more details.
3. Acquisition – before you can build, you need the land to build on. This can either be ‘greenfield’, with no buildings to clear, or ‘brownfield’ which must be cleared of existing construction before you can start your own project.
4. Construction/repurposing/refurbishment – depending on the nature of your project, you’ll either be building a hotel from scratch, repurposing a premises such as an office for change of use, or refurbishing an existing hotel property to be appropriate for your concept.
5. Pre-opening period – all hotel projects go through a pre-opening. This is the opportunity to finalise the fit-out, impement IT, do all recruitment, put the necessary departmental teams in place (training), to check the facilities are all working, to test menus… in short, to get the hotel fully prepared to welcome its first official guests.
6. Soft/hard opening – some hotels choose a ‘soft’ opening before going fully operational. During this time the hotel won’t undertake any concerted marketing, in order not to overwhelm the staff with too many guests. Other premises will go from pre-opening to formal opening, being either unwilling or unable to tolerate a period of reduced revenues.
7. Operations/ramp-up – Once fully open, it is generally considered that a hotel needs a period of around three years to ramp up to a sustainable performance level.
8. Refurbishment… or exit – the hotel renovation cycle is generally around 4-8 years, depending on the nature of the property and the level it is operating at (ultra-luxury hotels need more frequent attention). As owner, when refurbishment or renovation becomes due, you have the option to undertake this yourself or to exit the investment and allow a new owner to enter at stage 4 of this cycle.

Where to get finance for hotel real estate projects?

Without the money, there’s no hotel project. And that means having sufficient finance in place not just to start the project, but – crucially – to see it through to its conclusion, allowing for any missteps and unforeseen circumstances that occur along the way.

There are several potential funding sources for projects like these. Which you choose may depend on your creditworthiness, the risk profile of the project, and ‘cost vs. risk’ analysis you perform.

The primary funding sources to tap into are:

Sustainable and innovative hotel development practices

Provable progress in ESG (Environment, Social and Governance) is becoming an ever more important criterion among commercial lenders and investors. The same is becoming true for many consumers, who are increasingly influenced by a brand’s ‘green’ credentials when making purchasing decisions. Indeed, research indicates that 39% of consumers are willing to pay more for sustainable experiences.

Keen to be part of that conversation, we’ve invited expert faculty and external commentators to speak on this topic in our magazine, The Insider (you can read two examples here and here). We’ve also launched a specialized online course relating to sustainability within the luxury industry.

For hotels, sustainable innovations can take many forms. At an infrastructural level, energy saving devices such as motion-detecting lighting and ‘smart’ air conditioning are becoming commonplace, as is the use of solar panels and ‘green roofs’ that provide natural insulation.

One operator which has made sustainability central to its brand is 1 Hotels. The company pursues environmental certification for its properties, offsets carbon dioxide and supports ‘green’ causes among other initiatives. You can discover more here.

How a hotel interacts with its surrounding environment is also important. In a recent article for The Insider, Alex Slors, Program Director for the Master’s in Real Estate, Finance and Hotel Development highlighted the Ritz-Carlton in Grand Cayman, and its “Ambassadors of the Environment” initiative in partnership with the ocean explorer and environmentalist Jean-Michel Cousteau.

He writes, “This takes guests out into the island’s coral reefs to understand more about this incredible habitat and – crucially – it’s also open to island residents alongside the hotel’s guests. For many local children it’s a first taste of snorkeling and a unique opportunity to learn more about the nature it will become their responsibility to preserve.”

Hotel asset management

What does a hotel asset manager do

Perhaps the clearest way to describe the position of the asset manager, and what he or she contributes, is through this graphic:

In a recent article, we explain more about the importance of the asset manager and some of the key responsibilities of the role.

To summarize: a hotel asset manager works with the hotel manager and the brand to oversee the property’s financial and operational performance. The primary responsibilities of a hotel asset manager include financial analysis, expense management, asset maintenance, risk management, market analysis, communication, and collaboration.

The asset manager also acts as a conduit between the hotel’s brand or operator and its owner/investor, balancing the – often competing – priorities of the different parties. As the guardian of the financial investment made in a hotel, he or she is responsible for ensuring the right choices are made to maximize the value of the asset, at every stage of the cycle from initial purchase to eventual disposal.

Key objectives and strategies for successful hotel asset management

Among the key attributes for a successful asset manager is an ability to communicate and build relationships with all the stakeholders of a hotel: i.e. owner, brand / operator, general manager, etc.

Effective asset management for hotels also requires strong organizational skills to manage properties efficiently, track performance metrics, manage timelines and budgets, and identify areas for improvement.

It’s essential to have acquired some project management skills, since asset managers oversee and execute capital expenditure plans, renovations, and other initiatives to improve financial performance and guest experience.

As an asset manager, you’ll also be charged with ensuring that the property has the best financing package in place; and if not, to investigate what the potential upsides and downsides might be for refinancing.

Best practices in hotel asset management

There’s no ‘magic bullet’ to successful hotel asset management. Every property is different, with unique competitor sets, challenges and opportunities.

To offer a flavor of what’s possible, Alex Slors, the program Director for our Master’s in Real Estate, Finance and Hotel Development, gives two examples of successful asset management strategies.

• changing revenue management strategies
• treasure hunts to create more commercially usable space
• creative use of FF&E reserves in times of need

Careers in hotel real estate

A specialization in hotel real estate is among the many exciting hospitality careers available to you.

With a Master’s degree in real estate, you will have a wide range of potential career pathways, including:

• Real estate finance and investment
• Real estate asset management
• Hotel development (both from an investors and from a brand perspective)
• Real estate specific insurances
• Hotel financial management at brand / group level
• Consultancy services (valuation, M&A advisory, etc.)

And if you already have a hospitality degree, adding real estate expertise gives you a powerful skillset to appeal to employers across all these disciplines.