Davonne Reaves is the owner of three thriving hotels. Recognized as one of Hotel Management's Influential Women in Hospitality in 2024 and an emerging leader by the International Society of Hospitality Consultants, Reaves nurtures hotel owners and investors. As the co-host of the "NextGen in Lodging" podcast, Reaves explores the dynamic and ever-evolving hospitality landscape, sharing insights and exploring new trends. In this quarterly installation of her "How to Buy a Hotel" series for Hotel Management, Reaves shares some of her business strategy advice for hotel investment.
As we transition into 2025, the hotel industry is experiencing a significant revival. With a new Presidential administration in place, there's a renewed sense of confidence in the markets, leading to an increase in hotel transactions. This, in turn, is creating a surge in hotel ownership and investment. The hospitality market, which faced considerable challenges during the pandemic years, is now ripe for innovation and growth. This article explores the opportunities for hotel investment, the rising popularity of extended stay and conversion hotels and how innovative financing methods like seller financing and note sales can help you capitalize on this flourishing sector.
Why Hotel Investments Are Thriving
The intersection of economic recovery and evolving market dynamics is propelling the growth of hotel investments. A report by JLL predicts that global hotel investment volumes will increase, signifying a consistent recovery from past downturns. This upward trend is fueled by:
Rising travel demand: As companies relax their budgets and individuals regain confidence in traveling, both business travel and leisure tourism are witnessing a resurgence.
Market assurance: The current administration's stability is instilling optimism among investors, leading to an increase in closed deals compared to previous years.
Investment options diversification: Investors now have a broader spectrum of options to explore, ranging from passive investments like Real Estate Investment Trusts and crowdfunding to active ownership or development.
Passive Investment Options
For those seeking to invest in hotels without the operational burden, passive investment opportunities abound.
Hotel REITs: Investing in hotel-focused REITs is one of the simplest ways to gain exposure to the sector. REITs like Host Hotels & Resorts or RLJ Lodging Trust allow individuals to invest in a diversified portfolio of properties.
Crowdfunding Platforms: Crowdfunding democratizes hotel investments, allowing individuals to contribute as little as $1,000 to larger projects. Platforms like Vesterr, Fundrise and CrowdStreet are making it easier for small investors to back hotel developments or conversions. Crowdfunding can offer returns ranging from 8-15 percent annually, depending on the project.
Private Syndication Deals: Accredited investors with significant capital can join private syndications with hotel owners or developers. These deals often offer equity stakes or preferred returns, with internal rates of return exceeding 20 percent in high-performing properties.
Active Hotel Ownership
If you’re ready to take on the challenges of active hotel ownership, here is where I think there will be a continued increase.
Extended-Stay Hotels: Extended-stay hotels are booming due to housing shortages and the rise of remote work. These properties, which cater to guests staying for weeks or months, have occupancy rates often times higher than full service hotels, according to STR. Marriott’s TownePlace Suites and Hilton’s Home2 Suites are examples of brands capitalizing on this trend.
Hotel Conversions: The conversion of abandoned office buildings into hotels is gaining traction, fueled by the ongoing shift toward remote work. Adaptive-reuse projects can cost 30-40 percent less than ground-up construction, making them an attractive option for developers.
The Role of Creative Financing
Rising interest rates and tightening lending standards have pushed investors to explore creative financing methods. Strategies like seller financing and note sales are becoming indispensable tools for hotel investors.
Seller Financing: This approach allows buyers to bypass traditional banks by having the seller act as the lender. This arrangement is particularly useful for small investors or niche projects, as it:
- Offers negotiable upfront costs: Buyers can negotiate down payments.
- Offers flexible terms: Interest rates and repayment schedules are often more negotiable.
- Accelerates deal closures: Without waiting for bank approvals, transactions can be completed faster.
Note Sales: Investors can also purchase hotel debt at a discount through note sales, gaining control of properties indirectly. When banks or owners are motivated to offload distressed assets, note buyers can negotiate favorable terms and potentially acquire the underlying property through foreclosure or restructuring.
Challenges to Consider
While the opportunities are plentiful, hotel investing in 2025 is not without risks. These include:
Economic fluctuations: Although the current administration provides stability, external factors like geopolitical tensions or inflation could impact the market.
Labor shortages: The hospitality industry continues to face challenges in recruiting and retaining staff, which could affect operational efficiency.
Competition: As more investors enter the market, securing deals in prime locations may become more challenging.
The hotel industry in 2025 is rife with opportunities for both seasoned and new investors. Whether you prefer passive investment through REITs, crowdfunding, or private deals, or wish to actively own and manage properties, the sector offers numerous paths to profitability. Extended-stay and conversion hotels are particularly promising, addressing critical housing and urban needs.
Creative financing methods like seller financing and note sales make hotel investment accessible, even amid higher interest rates and stricter lending standards. By leveraging these strategies and staying informed about market trends, you can position yourself for success in the evolving hospitality landscape.
With the right strategy, 2025 could mark the beginning of a lucrative journey in hotel investment. Whether you’re looking to dip your toes in the water or dive in headfirst, there has never been a better time to explore the potential of the hospitality sector.
References
1. JLL Global Real Estate Report, 2024.
2. STR Extended-Stay Hotel Market Analysis, 2024.
3. CBRE Adaptive Reuse Trends in Hospitality, 2024.
4. NAREIT Hotel REIT Performance Report, 2024.
5. CrowdStreet and Fundrise Platform Data, 2024.
This article was originally published in the January edition of Hotel Management magazine. Subscribe here.