What Drove Hotel Values to Decline in 2020?

The once-in-a-century pandemic has caused hoteliers to endure a firestorm that decimated the hotel and leisure industries.

The growing COVID-19 cases across the U.S., as well as government restrictions on travel that further stress demand, continue to leave the hotel industry significantly behind pre-pandemic levels in terms of revenues, profitability and valuations.

Gateway cities such as New York, Chicago, and Los Angeles are experiencing some of the highest delinquencies in the nation as international travel and tourism in the U.S. remains at a near standstill. Other markets, such as Houston, have been especially hard hit due to the struggles in the oil industry.

Nationally, CoStar’s hospitality analytics firm STR reports that 2020 occupancy declined 33% while average daily rate fell 21%, resulting in revenue per available room of $45.48, which is a decline of 47.5% from 2019. STR also noted that hotel profitability declined 84.6% in 2020. Along with the substantial decline in revenues is the corresponding decline in hotel valuations throughout the United States, resulting in the need for many hotel properties to consider a real estate tax appeal.

Hotel Value Declines

While hotel values have declined overall, the weight of the decline varies based on chain scale, location, source of demand and level of service. For example, economy and midscale properties in interstate locations, particularly limited-service and extended-stay hotels, have seen a lower percentage of value reduction. This is largely due to the sources of demand that the properties serve, such as the transportation industry, construction crews, temporary housing and travelers deemed essential. The most impacted group, however, is represented by luxury properties in gateway markets or fly-to destinations and resorts. These properties are full-service and convention hotels that accommodate groups and conferences, international travelers, and corporate travelers. Cancellation and postponement of meetings and conferences have caused these hotels to close or sit nearly empty at times.

With the decline in value, sales transactions dropped sharply. According to Real Capital Analytics, transaction volume fell by more than two-thirds compared to 2019, to the lowest mark since 2009. But the economy-branded hotels’ sales market fell by only 22%. The only commercial real estate sector that performed better in 2020 was the industrial sector. Economy-branded hotels saw market share grow from an average of 5% of the market between 2015 and 2019 to 16% in 2020.

In recent months, the number of properties coming to market has increased as sellers become more realistic in their pricing. CBRE found that 61% of buyers expected a discount from pre-pandemic prices, but only 9% of sellers were willing to offer discounts. Transactions that have occurred generally reflect discounts of 20% to 40% compared to pre-COVID-19 levels. However, the pricing gap appears to be closing.

Economic pressures brought upon by the pandemic are presenting opportunities to acquire assets from motivated sellers facing tough economic pressures. While there may be a number of compelling buying opportunities, historically low interest rates and investors that have accumulated capital in anticipation of distressed hotels coming to market may result in hotels selling for better than distressed pricing.

Capitalization Rates

Lodging industry cap rates in 2020 have been volatile due to the COVID-19 crisis, resulting in uncertainty for investors.

USRC’s 2020 Mid-Year Survey shows only modest upward movement in capitalization and discount rates from their Winter 2020 Survey: “The 30-basis point upward movement in limited-service hotels and 40 basis points in full-service hotels is certainly material, but does not reflect overall investor panic, given the historic downturn in travel seen since late first quarter 2020.”

The PwC Real Estate Investor Survey indicates a slight increase in overall capitalization rates for limited-service hotels, but a slight decrease for full-service hotels on average. The Realty Rates Investor Survey indicates a decline in overall capitalization rates for both limited and full-service hotels.

Surveys from other firms offer mixed results with no directional consistency.

Hotel Pricing

Due to lower valuations, investors are perceiving that hotel deals made during the pandemic will be more profitable than those deals made following the Great Recession.

Today’s lower valuations result from factors both preexisting and COVID-19 related. COVID-19 has driven costs in more frequent and more visible sanitizing and disinfecting rooms and public areas, implementing infrastructure to enable contactless check-in and entry to rooms, and marketing campaigns to attract safety-conscious travelers.

While transaction activity is very low, investors are looking to acquire the underperforming yet top-quality assets. The dislocation in hotel fundamentals has made hotel pricing more attractive. Distressed properties might well represent redevelopment opportunities to investors. Real Capital Analytics estimates that 8% of hotel investments are from groups intending to redevelop the asset. This represents the highest percentage since 2008.

Buyers with sufficient capital or the ability to obtain financing are looking for hotels whose performance shows that the property, and potentially the market, have turned the corner. As construction costs continue to climb, barriers to entry are substantial and many current valuations are well below replacement costs. Thus, opportunities exist for patient capital.

Destination vacation locations can be anticipated to come back strong. During the summer of 2020, drive-to vacation destinations saw strong occupancy from pent-up leisure demand. Convention markets and fly-to destinations will continue to struggle until consumer confidence in the control of the pandemic becomes widespread.

Reasons for Optimism

For the hotel operator who has battled through 2020, there are reasons for optimism.

Lenders want to be flexible. Forbearance was the remedy in the early months when the severity of the pandemic was not well-known. More recently, lenders have shown a willingness to renegotiate loans. While lenders realize that borrowers are burning through liquidity, they want to see responsible cash management on the part of the operator they are working with.

As many hotel owners are also small business operators, the infusion of federal CARES Act stimulus has provided a modest operational cushion. Further stimulus packages may well provide needed incentive to allow these small business operators to survive. The more targeted the stimulus packages as it relates to the hospitality industry, the greater the optimism.

There is a marked deceleration in new hotel construction activity. CBRE forecasts hotel supply to increase by 1.4% in 2021, but supply gains will drop below 1% in 2022, thus lowering the impact of new competition as lodging demand recovers. The continued rise in construction costs will contribute to the muted growth of new supply despite lower interest rates.

The success of bringing a COVID-19 vaccine to market is encouraging. The implementation of the rollout will encourage leisure and business travelers. Reports note that U.S. personal savings rates increased dramatically in 2020, providing liquidity to the leisure demand segment of the travel market. Hotel brands and markets that are drive-to leisure locations will lead the lodging economy back. Corporate travel will follow, especially if liability protection is legislated. Convention and meeting markets will return as the overall comfort level of travel improves.

Real Estate Tax Appeals

With the sharp decline in property values brought on by the pandemic, a real estate tax appeal opportunity for many hotels exists as of Jan. 1. While the recent surge in COVID-19 infections dampened expectations for hotel performance through the first half of 2021, the introduction of effective vaccines should improve the performance of the U.S. lodging sector beginning in earnest during the second half of 2021. The confidence provided by a vaccine will sustain the relatively strong leisure travel observed in the summer of 2020.

While overall 2021 performance is anticipated to be better than 2020, commercial demand growth is still expected to be constrained and international travel will remain at a standstill. Convention activity is projected to be the final market segment to recover. As a result of these market dynamics, average rates, although growing at above inflationary levels, will continue to substantially trail 2019 levels. Most projections do not anticipate full recovery to 2019 levels before 2023 or 2024. Thus, in many markets, the valuations that currently exist within the assessor’s files do not reflect current market conditions and should be appealed.

But what of 2020? Does the financial stress that hotel owners experienced in 2020 due to the COVID-19 pandemic suggest that a property can appeal and receive a reduction in its real estate taxes as of Jan. 1, 2020? Possibly not. Most jurisdictions set assessed or theoretical market value for the real estate tax year as of Jan. 1. To impact the valuation of the 2020 tax year, the events that took place related to the COVID-19 pandemic would need to have been known as of Jan. 1. According to STR, January and February 2020 nationwide gross operating profit per available room and earnings before interest, taxes, depreciation and amortization per available room were down but less than 1.5% in either month. Thus, the severity of the impact of COVID-19 was not on the foreseeable horizon as of Jan. 1.

Each market is subject to local dynamics affecting supply growth, demand generation and expense levels that influence the outlook for hotel performance. As all valuations are property-specific, there may well be reason to appeal a Jan. 1 valuation of real estate that was overlooked due to the challenges associated with the pandemic. As 2019 ended, revenue-per-available-room growth had slowed but costs continued to rise, and 2020 was expected to follow suit. Many markets were experiencing a combination of supply increase and limited ability to increase room rates. The hotel industry was suffering through a labor shortage due to record low unemployment with increased minimum wage rates and other local mandate rules; thus, labor costs were expected to rise above inflation in 2020. The outlook for 2020 also included expectations of growth in property taxes and insurance expenses as well as operational expenses that had been growing faster than RevPAR.

Additional factors impacting ADR, beyond traditional growth in local market supply and low inflation, were the growing competition from the sharing economy — Airbnb and VRBO — and the expansion of intermediaries in the sales process. As 2020 was an election year, the fundamentals were expected to be affected by a tense political environment. Also, the degree of difficulty for some international travelers to gain access to the U.S. due to visa restrictions was a challenge for markets that historically benefited from significant overseas-based tourist demand. Many franchisees noted that the continued launch of new brands and the saturation of brand parent companies in certain markets represented a concern, as the limited and available brand-loyal customer base was spread among more rooms.

Though it depends heavily on market conditions, many properties, especially in urban environments, could benefit from an examination of their real estate tax valuations in 2020 and 2021 reflecting the previous market conditions and the impact from the COVID-19 pandemic.


Hotel values will continue to struggle into 2021 as the pandemic continues to disrupt the travel and leisure industries. This will present opportunities for investors but continued challenges for owners and operators. Lender flexibility, government actions and the successful rollout of the vaccine will impact hotels at all levels. Though 2021 will remain a turbulent and challenging year, there is tangible hope that the second half of the year will see continued improvement across all segments. While challenges will remain for operators, the decline in performance does present the opportunity to appeal property valuations across many segments and in many markets affected by the overall decline in profitability and performance.

Joseph Pierce is director of appraisal & consulting services with Hotel & Leisure Advisors. He can be reached via email at jpierce@hladvisors.com.