On today’s show we are going to put forward a hypothesis. A hypothesis is an untested idea. It’s hypothetical which is why it is called a hypothesis.
Specifically we’re going to look at the balance of revenue and expenses that make for a profitable venture in hospitality.
It’s no secret that hotels suffered greatly during the pandemic. They were forced to close as the stay at home mandates caused travel of all kinds to dry up. A few that agreed to become quarantine facilities enjoyed some revenue thanks to the very government that forced the closure.
Short term rentals suffered greatly as well. Depending on the location, some managed to get revenue from traveling health care workers who were on pandemic duty to provide relief to overworked and overstressed ER facilities.
If you’ve traveled lately, you will notice that hotels have become a lot more expensive. I used to find bargains for hotels in NYC for $150-200 per night prior to the pandemic. Sure you could spend $1,200 a night if you wanted to. But you could still find good hotels in good areas at a decent price.
In Toronto, I could find bargains in the downtown core for under $200 a night.
This week I was at a conference in Toronto and it was extremely difficult to find a hotel room in the downtown core at the last minute under $500 a night. Most were $700 a night.
Several of the people I spoke with at the conference had booked a short term rental and were grateful to have paid a lower nightly rate than the equivalent hotel room.
It’s no secret that interest rates have gone up. You had to be living under a rock to have missed that one. Hotels are sometimes owned by the brand, but often are independently owned and flagged under a franchise agreement.
The issue is that a significant percentage of the hotels in the world were funded through bond offerings at extremely low interest rates over the past decade.
Some of these hotels have bonds coming due this year and next year and the year after that. They will be forced to refinance at higher interest rates.
This means that those hotels will need to increase their nightly rates in order to survive. If the market won’t tolerate higher nightly hotel rates, then the owner will have to hand the keys back to the lender. A hotel in foreclosure is likely to close which will remove supply from the market, which in turn will push up nightly rates.
I don’t see a scenario in which hotel rates don’t go up from here. Even in a recession, falling travel won’t mean lower nightly rates. The hotels will fail. So the only choice for owners is to raise nightly rates. They have no choice.
They have to find a way to increase revenue or die. I’m convinced that the hotels will act in tandem to protect the industry.
If hotel nightly rates go up, then STR rates go up.
There you have it. That’s the hypothesis. The only thing that could hurt STR owners is if government steps in and forces STR to close, or imposes regulation that is so onerous, that is makes an STR business impractical. Local governments might do this to protect the hotels from going under.
Of course everything I’ve said on today’s show neglects the hyper local nature of real estate, hospitality and STR. Your local situation could vary widely. But maybe an analysis of the hotel business in your area could yield some valuable data that might validate, or maybe invalidate this thesis.