Markets & Economy

Summer is synonymous with travel and vacation for so many families and individuals. But the bounty of sectors involved in the travel industry have, like so many others, been slashed by the pandemic’s continued takeover, and the hotel industry is no different.

Today we’re taking an in-depth look into the hotel industry. How is it surviving? Are hotels still being built? What does the future look like for demand?

Business or Pleasure?

The pandemic isn’t destroying all demand for hotel rooms– just changing the ways that people are traveling. In the hotel industry there are two main types of demand– business and pleasure, and both have been impacted by recent events.

Travel for business remains depressed to unprecedented levels. Many wonder if newfound comfort in digital meeting technology (e.g., Teams or Zoom) will one day make this type of travel obsolete. However, we believe that a permanent, total removal of business travel is unlikely. Many companies will continue to have meetings and conferences in-person, and we believe business activity could return to pre-virus levels. We saw the same kind of bounce back in demand after other crises, like 9/11 and the 2008 Financial Crisis.

In fact, an increase in the prevalence of remote workers might mean good things for hotels – those who live in a different city than their office will need a place to stay should they have to visit headquarters every few weeks or months. Additionally, some hotels are seeing an uptick in reservations for traveling health workers, the national guard, and individuals from the Federal Emergency Management Agency (FEMA).

Vacations travel is not doomed, either. Numerous domestic travelers have already booked and been on trips this summer, oftentimes choosing locations that are closer to home, or locations that are drive-able rather than requiring a flight. This means good things for major, branded hotel companies.

These types of companies have the assets available to branch into smaller, non-urban markets. These very same markets are now becoming targets for travelers, who remain wary of big gateway cities. Large urban centers tend to have more independent, boutique hotels, and it will likely take them the longest to recover the travel presence that they once had.

Underlying Fundamentals

While there’s many ways to invest in travel, we don’t think all of them are well positioned to survive the pandemic. In our view, we think the long-term opportunity is in select large, listed hotel chains.

One of the reasons why is that these major hotel operators tend to be far more asset-light than most people realize, which means they might not actually own the physical buildings they operate. This business structure works its way into the P&L, and their earnings are less cyclical than more asset-heavy sectors, like cruise lines.

Another element that makes the listed, large brands strong is their ability to withstand even the lowest of dips in demand. Unlike independent hotels, these types of hotels have the cash to keep doors open, even in bad times. They also have large market share and continue to increase it.

Lastly, the pandemic may give large hotel brands an opportunity to take share from house rental companies like Airbnb. Some renters are pulling their properties offline for personal safety concerns, and some travelers trust hotels to have more rigorous cleaning standards than rental homes.

Source: Global Business Travel Association poll of travel professionals, July 2020

Room to Grow

It’s important to not only analyze the current factors at play in this industry, but also what the future may hold for hotel businesses.

Many of the larger hotel names have sizable pipelines of rooms either under construction or in the process of conversion. This means smaller, independent hotels could be joining a brand system, and the lift to renovate is quite light, especially since the larger brands have access to more capital for these types of projects.

The ability to keep these pipelines full could mean the difference between failure and success for these companies and will be vital for their long-term recovery.

We believe that certain hotel brand names are undervalued, and they’re not pricing in the success that the travel industry is likely to see post-recovery. Today’s ultra-low demand is unsustainable, and we’ve already seen some positives in this area, a demonstration that people will begin to travel as soon as they feel it’s safe enough to do so.

Looking Forward

Global and domestic travel isn’t gone forever, and many people are itching to get back on the road as soon as possible. While hotels might be struggling right now, certain industry leaders have a strong opportunity to gain market share throughout this pandemic period.

We look at not only current trends, but the overall scope of an industry before making an investment decision. Successful portfolios don’t rely on investment fads, but are built by solid, enduring businesses that can be strong long-term additions to a comprehensive financial plan.

This material contains the opinions of Manning & Napier Advisors, LLC, which are subject to change based on evolving market and economic conditions. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.