The cyclical hotel business often depends on various shallow economic demand generators.

Hospitality is a multi-billion-dollar business in which finances weigh heavily. This mixture of economic circumstances leaves hotels vulnerable to the market. Many hotels need to reach their financial goals, leading them to fail. These failures are often avoidable if the unique area of struggle can be determined before official ‘distress’ Extensive research into the hotel market has exposed ten neglected stressors that lead to hotel failure.
 
One famous name in the hotel industry is Stephen Nalley. Stephen Nalley is the creative visionary behind Black Briar Hotel Group and Black Briar Advisors, a trailblazing full-service real estate investment company specializing in transforming distressed hotel & resort assets. With over 2 billion dollars of transaction value, Stephen and his team are experts at every stage, from acquisition to asset management to renovating – delivering unprecedented returns for investors. Together they have built an impressive portfolio with more than 100 properties across multiple countries!

Being the best in his field, Stephen has shared a few pointers that every hotel investor should remember while investing. According to Nalley, hotel investments come with their share of risk, and a few of them can be found below.

The Operating Reality of Hotels Makes Them Particularly Vulnerable to General Economic Cycles

Hotels are fragile to the changes in a broader economy. Gross revenue is geared down to aligning the occupancy of rooms and the average rate of occupied spaces. Hotels often suffer when new rooms go into service without sufficient occupancy/demand, causing the hotel financial distress through price cutting. The grief will remain until the market and rates revive the hotel with an economic peak. 

Hotels are Capital Intensive, with an Inevitable Replacement Cycle

Given the predictability of renovation cycles, and the knowledge that the last phase of renovation coincided with the end of the recession, the fact is inescapable that the following renovation needs will fall due in the next several years. We will face that cycle with significantly different and less favorable reserve practices in effect.

Hotels Are Operating with a Higher Ratio of Fixed Costs to Revenue

The failure of hotels to maintain and improve profit margins while recording record gross income has been one of the most persistent complaints from investors in the last 24 months. The complaints have been over possible mismanagement or breach of contract leading to inadequate profitability. The protests have not yet been in the context of default. In some situations, the recent complaints have been negotiated and resolved, but positions are generally hardening as profitability goals are less achievable, and revenues may decline. Open litigation seems inevitable. There is little question that the constriction of profitability and the practices that lead to it (discussed below) discourage new investment by the most sophisticated investors.

The Lodging Industry has a Very Thin Investor and Lender Base and May Easily Lose Liquidity.
Current investment and lending activity in the market is centered on pension funds, institutional investors, and private funds, all of whom target the highest-quality properties. “Opportunity” or vulture investment funds are reported to accumulate capital for targeted investment in hotel properties as prices decline. The more traditional institutional or fund investors are more sensitive to the perception that hotels are out of favor. The growth in attention from securities analysts and rating agencies contributes to a lack of hotel enthusiasm.

Archaic Documentation and Information Reporting Is Widespread

Using real estate mortgage documents as a basis for hotel lending reflects a fundamental need for understanding the issues that will face a lender in a distressed market. When an office building or net leased property goes into mortgage default, the probable goal of the lender will be to take back the property as expeditiously as possible and to control the rents and essential expenses via a lock box or receiver until that process is completed. Losses in the foreclosure process for office buildings are associated with undue delay or leakage of rents. The value will be recovered from a physical condition, location, and market competition essentials.