Biding time for business hotels

Borrowers and lenders are optimistic that the sector will pick up momentum as business travel makes a comeback, but questions remain over how that will take place.

Business hotels, a key sub-segment of the US hospitality market, continue to face headwinds as the US emerges from the covid-19 pandemic. But borrowers and lenders are hopeful that this part of the market will shift into high gear as business travel resumes.

There are some positive indicators for the broader US hotel sector. Data from Smith Travel Research, a data and analytics firm focusing on the US hotel sector, showed in early March that hotel properties in the 25 largest US markets saw aggregate occupancy of more than 65 percent for the first time since early August 2021.

Los Angeles, San Diego and Miami even saw occupancy top 70 percent in the week ending March 5 and, across the board, revenue per available room (RevPAR) is about 8 percent higher than it was during the same period in 2019.

But despite these green shoots, there are still concerns about how business travel will rebound, market participants tell Real Estate Capital USA.

“There are certain asset classes right now that you start to question and the hospitality industry is one,” James Shevlin, president and chief operating officer at CW Capital says. “Purchasing hospitality right now is a little more challenging, and business hotels is a very tricky sector.”

While there is ample capital for transitional loans, the bigger question is what happens when these loans mature.

“Any property relying upon a Monday-through-Thursday business traveler has been and will be a struggle,” Shevlin says. “The way we work now and the way we live going forward will definitely have an impact on those properties.”

Suraj Desai, a senior managing director at New York-based advisory Black Bear Capital Partners, tells Real Estate Capital USA the conduit market or other permanent loan options are largely closed to borrowers who want to acquire business properties.

“Transitional debt is probably the best form of execution in this space, and that is because the [sector] is not fully ramped up [nor] stabilized yet,” Desai says. “This means people will need to refinance into a more permanent debt structure, and with rising rates, there is risk here.”

US hotel market,
then and now 


Average US hotel occupancy levels in 2021, a 12.6% drop from 2019, according to Smith Travel Research


Average daily room rate for US hotels last year, a decline of 4.8% from two years ago


RevPAR for US hotel properties in 2021, a 16.8% decline from the same period in 2019

Not all doom and gloom

Still, the amount of capital being allocated to the hotel sector has increased in the last six months. Silverstein Capital Partners, MetLife Investment Management, King Street Capital Management, and Madison Realty Capital are among the managers that have raised capital for hospitality-focused or related strategies.

Charles Foschini, a senior managing director at advisory Berkadia, believes there will be an uptick in business travel in the second half of the year that will align with rising interest in business hotels and a broader recovery.

“[We] will start to see a wider-scale attendance at conferences and business ventures of that nature and those hotels will start to see business come back in a more normalised way,” Foschini says.

Stephen Bittel, founder at Miami-based Terranova Corporation, believes business travel is beginning to increase. “[This year] will be a much stronger year on the business side, with some company travel slowly making progress,” Bittel says. “I would say people do anticipate each year to be better than the previous, and people are still looking to acquire those hotels now.”

Black Bear’s Desai says he is hearing a bullish outlook in the market. “Talking to appraisers and investment sales brokers, everyone still seems very bullish on the forward-looking outlook on hotels in terms of performance,” Desai says, adding there are expectations of increases in occupancy and average daily room rates. “Lenders are still lending to those hotels, even though there’s limited comparisons that support that [on a] per key basis.”