Hospitality: Hotels and Motels
Hospitality: Hotels and Motels
Hospitality real estate — hotels, motels, and resorts — is the most operationally complex and cyclical commercial real estate asset class. It attracts only specialized investors willing to manage revenue, expenses, and tenant relationships daily.
Key takeaways
- Hotel income is per-room-night (occupancy × average daily rate), not per-month like apartments or offices
- Revenue per available room (RevPAR) is the key metric and fluctuates 30–50% with economic cycles and travel demand
- Hospitality is the most cyclical CRE asset class, hitting lows during recessions and highs during booms
- Operating expense ratios in hospitality are 50–65% (much higher than multifamily's 40–45%), compressing profit
- Hotel REITs and branded operator partnerships dominate; individual ownership is rare and requires deep operational expertise
Hotel economics: The basics
A hotel's revenue is driven by three metrics: occupancy rate (percentage of rooms occupied), average daily rate (ADR, the nightly rent), and thus revenue per available room (RevPAR). These are multiplied against room count and days operated.
A 100-room hotel at 70% occupancy, $150 ADR, operating 365 days generates:
- Room nights sold: 100 × 365 × 0.70 = 25,550
- Revenue: 25,550 × $150 = $3,832,500 annually
- RevPAR: $150 × 0.70 = $105
RevPAR is the headline metric. A $200-room hotel in a strong market might have RevPAR of $120–140. A hotel in a secondary market might be $80–100. During strong economic years, RevPAR spikes (higher ADR, higher occupancy). During recessions, it collapses (lower ADR, lower occupancy). A 30–50% swing in RevPAR year-over-year is not unusual.
Operating expense ratios
Hotel operating expenses are high, typically 50–65% of revenue, compared to 40–45% in multifamily. Hotel operating includes:
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Labor (30–35% of revenue): front desk, housekeeping, maintenance, management. Labor is the dominant cost and difficult to variable-cost when occupancy swings. You cannot lay off half your staff when occupancy drops 20%.
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Cost of goods sold (3–5% of revenue): food and beverage for in-hotel restaurants and room service; toiletries; linens; etc.
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Utilities and property taxes (8–12% of revenue): hotels are energy-intensive (climate control, lighting, hot water).
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Management and franchise fees (4–10% of revenue): many hotels are branded (Marriott, Hyatt, IHG). Brands charge a percentage of revenue for reservation systems, marketing, and quality control.
This leaves 35–50% NOI on revenue for debt service, capital expenditure, and owner profit. This is dramatically lower than apartment or industrial, where 50–60% of revenue becomes NOI.
Cyclicality and economic sensitivity
Hospitality is the most cyclical CRE asset class. Travel is discretionary. Business travel is the first to decline in downturns. Leisure travel follows. During the 2008 financial crisis, hotel occupancy fell from 75% to 55–60% nationally. RevPAR fell 30–40%. Properties financed at assumptions of 75% occupancy suddenly faced 55% occupancy and were deeply underwater.
The 2020 pandemic was acute: hotel occupancy fell to 25–35% as travel halted entirely. Recovery was fast (occupancy was back to 70%+ by 2022), but properties that had limited liquidity or high debt could not survive the valley.
In booms (2005–2007, 2017–2019, 2021–2022), hotel occupancy soars, ADR spikes, RevPAR hits highs, and values inflate. Conversely, even shallow recessions hit hotels hard. A mild recession that reduces office worker productivity by 5% might reduce hotel occupancy by 15–20%.
Hotel types and segments
Hotels segment by brand class and service level.
Luxury and upscale hotels (Four Seasons, Ritz-Carlton, Hyatt Regency) have ADR of $200–500+, attract affluent travelers and convention business, and are located in prime markets. RevPAR is high ($150–250+), but so are operating costs and capital requirements. These are typically held by branded operators or institutional funds.
Midscale hotels (Marriott, Hilton, Starwood brands, ranging to "select service") have ADR of $100–180, serve business travelers and families, and occupy secondary markets. RevPAR is $70–130. Operating is more standardized, but competition is intense. Cap rates are 5–6%.
Economy and budget hotels (La Quinta, Red Roof, Motel 6) have ADR of $40–90, minimal frills, high occupancy rates (often 75–85%), and are concentrated on highways and secondary markets. RevPAR is $40–70, but margins are thin because of commodity nature. Cap rates are 6–8%.
Resorts (all-inclusive, destination properties) have high ADR and strong seasonality, with demand concentrated in holiday and summer periods. Operating is complex, capital-intensive, and requires destination-specific expertise.
Institutional investors have historically preferred midscale branded hotels with professional management because they balance ADR, occupancy, and operational simplicity.
Franchise agreements and brand quality
Most hotels operate under a brand agreement with a hotel company (Marriott, IHG, Hyatt, Choice Hotels). The brand company manages the reservation system, quality standards, and marketing in exchange for a franchise fee (typically 4–10% of revenue) and a percentage of revenue for the reservation system and loyalty program.
Brand quality matters enormously. A Marriott or Hilton in a secondary market is more stable than an independent hotel because the brand drives occupancy through national marketing and booking systems. But the franchise fee is a fixed cost that compounds when RevPAR declines.
Hospitality REITs
Hotel REITs like Host Hotels & Resorts (NYSE: HST), Xenia Hotels & Resorts (NYSE: XHR), and Apple Hospitality REIT (NYSE: APLE) manage the operational and cyclical complexity by holding diversified portfolios across brands, markets, and service levels. REITs can absorb individual property volatility through scale and can refinance or sell properties strategically.
A hospitality REIT provides equity investors with diversification but also with direct exposure to RevPAR trends, interest rates (REITs are more sensitive to rates than other CRE), and travel demand. Hospitality REIT valuations swing widely with sentiment.
Capital intensity and reinvestment
Hotels require significant ongoing capital investment. Rooms must be refreshed every 5–7 years. Common areas, restaurants, bars, and back-of-house require regular upgrades. Brand companies often mandate capital spending to maintain quality standards.
This means that a hotel generating $500,000 annual NOI might require $50,000–100,000 annual capex, leaving $400,000–450,000 for debt service and owner distribution. This reduces returns significantly relative to the headline NOI.
Operator risk and leverage
Many hotel owners are not hotel operators; they own the building and lease it to an operator under a lease structure. The operator pays the owner a base rent plus a percentage of profit. This separates the real estate risk (building condition, location) from operational risk (ADR, occupancy, expense control).
But operator relationships can be fraught. If an operator underperforms, the owner receives below-market returns. If the operator goes bankrupt, the owner must find a new operator or operate the property themselves. Hotel operator bankruptcies are not rare; the volatile nature of the business makes it risky for operators with limited capital.
Flowchart: Hotel investment decision
Next
Hospitality is complex and cyclical — suited only for investors with operational expertise or capital to diversify risk through REITs. Self-storage, by contrast, is simple and recession-resistant. Next we examine self-storage and why it has become an institutional favorite for low-capex, high-margin cash flow.