Few people have the pulse of U.S. hotel dealmaking as does Kevin Davis of the advisory service JLL. So it's striking that he sees growing investor interest in hotels with limited amenities and staff.
Editor’s Note: Skift Senior Hospitality Editor Sean O’Neill brings readers exclusive reporting and insights into hotel deals and development, and how those trends are making an impact across the travel industry.
Davis said he is seeing more wide-ranging investor interest in U.S. select-service properties, which are hotels without the restaurants, room service, and other amenities of traditional hotels.
- Select service has long been a key part of the hotel mix.
- But it hasn’t been a sexy category attracting big money. A more glamorous deal would be Mandarin Oriental’s $139 sale of a full-service hotel in Washington, D.C., to Henderson Park, which JLL closed this month.
- What’s changed is that institutional investors and high-net-worth families are now seeing the virtues of select service as assets.
- “There’s an increased institutionalization of the select service business, which continues to grow,” Davis said.
- While JLL’s core business will remain full-service hotels, it wants to expand in select service. “We’re retooling our efforts there and hiring more people to execute on the select service investment sales business and grow with the market.”
- While JLL’s teams used to be concentrated in five offices, post-pandemic, it’s placing more people in more markets.
- “We’re focused on more products than just full service,” Davis said. “We’ll also do select service, portfolio select service, individual asset sales, middle markets, alternative accommodations, etc. It’s a bigger business with more people in more locations with a broader client offer.”
A few trends are driving the appeal of select service properties.
- The pandemic highlighted the advantages of running a property that requires less labor to be profitable during a downturn. Select service can be more resilient across economic cycles.
- Hybrid work was validated during the pandemic, and more workforces will be either distributed or doing work on the road more often. These trends could be a boon to select service properties, which are more cost-efficient at serving a broader geographical footprint.
- Select service properties, particularly in sunbelt cities, have outperformed most other asset classes during the pandemic, burnishing their appeal.
- “You might have a meeting with an ultra-high-net-worth family and they woke up one day and said, ‘I want to own select service hotels in Florida,” Davis said. “It’s not something that until now you would have typically seen.”
Alternative accommodations are another category that will be attracting interest from investors that have traditionally stuck with hotels, Davis said.
- “Regional owners that may own hospitality along with other types of commercial real estate are now identifying opportunities in short-term rentals,” Davis said.
- JLL sees a chance to help groups that are aggregating assets raise capital via debt and equity.
- “At some point in the next three to five years, you’ll have institutional owners of traditional hotels also owning short-term rentals,” Davis said.
- He expects within the same timeframe for institutional investors to create the first real-estate investment trusts specializing in short-term rentals, similar to the popular hotel ones today.
- “You’ve got the rise of professional managers attempting to brand their properties,” Davis said, implicitly referring to companies such as AvantStay and Placemakr. “But they have a heavy reliance on Airbnb for demand, and Airbnb has really built its brand. Right now, more of the branding is really tied in guest minds to Airbnb as opposed to the management companies with brands.”
JLL has been expanding the depth and breadth of the services it offers.
- It’s looking to grow its hotel debt financing business, leveraging the capital markets presence it gained when JLL acquired HFF in 2019.
- “Post-merger, we’re capitalizing via debt and equity a lot more hotel construction deals and hotel mixed-used deals,” Davis said.
- “We’re also expanding our ability to raise joint venture equity to grow our capability in structured transactions,” Davis said.
As JLL Hotels & Hospitality hires for growth, it’s keeping its eye on diversity.
- “Diversity is something an organization has to have a sustained commitment from the top down,” Davis said.
- “It’s not just hiring a person of color or a woman and saying, ‘Okay, we’re done’,” Davis said. “It’s continuing to provide support and mentorship to enable them to progress in their careers.”
- “You may have situations, say, with your summer program where the pay in some cases may not be incredibly high,” Davis said. “Kids coming from more privileged backgrounds may be able to work for a limited amount of money without a problem. But for some candidates, compensation is an issue. So by providing an additional stipend, or housing, or similar assistance, you can lead to a better outcome in goals.”