Covid-19 dealt a heavy blow to hospitality. Business travel expenditure has fallen 61 percent, while leisure travel expenditure has halved. However, as we all cross our fingers that the worst of the pandemic is behind us, hotels are bouncing back and significant sums of freshly raised capital are targeting the hospitality sector.

The number of hospitality funds closing has been on a downward trend over the past five years, pre-dating the pandemic, declining from 15 in 2017 to less than half that total in 2021. However, despite there being fewer funds, last year saw the second-most capital raised in that time at $3.35 billion, which trails only 2019’s total of $4.24 billion.

Almost half of all hospitality fundraising over the past five years has been for funds focused on North America, including six of the 10 biggest funds. The largest, the $2.7 billion KSL Capital Partners V which closed in 2019, has a multi-regional remit. It also helps explain why 2021 wasn’t the year with the most capital raised. As the sector bounces back, it is doing so having undergone some significant changes.

Operators are increasingly looking to provide and create experiences. Travelers are no longer looking simply for somewhere to stay; they increasingly want to stay somewhere unique.

Figures from Expedia show that 22 percent of leisure travelers are looking for once-in-a-lifetime experiences, prompting hotels to increasingly repurpose public areas as all-encompassing hospitality offerings.

There are hotel operators that have long built their businesses around certain experiences – such as wellness or adventure – and others that have adapted to that. “Rebranding and repositioning plays have and will continue to become increasingly common, as investors seek to take advantage of a new investment cycle,” says Philippa Goldstein, senior analyst at broker Knight Frank.

Another broker, Colliers International, calculates that hotel turnover could be increased by up to 20 percent by providing office spaces for co-working and greater guest interaction. This has led to independent venues and larger chains alike seeking to provide spaces dedicated to modern workplace needs. Accor, for example, has launched its own coworking brand, with plans for more than 1,000 networking spots by the end of the year.

The rise of ‘bleisure’ travel, blending business with leisure, is expected to be a key trend for the industry.

Simon Hultén, investment manager at CapMan Real Estate, notes that hotels are going to have to “understand their guests and effectively cater to their needs and wants throughout their stay,” which might change on different days and at different times, “if they want to benefit from the bleisure effect going forward.”

Luxury service at budget prices

For hotels to adapt their offering is all well and good in theory, but operators must also give serious thought to how they afford to do that. “In the current environment, the challenge centers on [maximizing revenues] by controlling costs,” says Javier Arús, senior partner at Azora Group.

Labor costs – in salaries, wages and other benefits – account for half of hotel operating expenses. Maximizing profitability depends, therefore, not only on repurposing space and extracting value from it, but also on controlling those costs.

This issue is particularly acute for full service and luxury hotel properties. Guest satisfaction for these properties is particularly tied to the level of service that staff are able to provide – and stretched staff provide more limited service.

While guests may have been understanding of dips in service during the worst of the pandemic, now that a recovery is underway, expectations are also increasing. Luxury hotels therefore need to find a way to manage expectations and align them with available staffing. There are ways to do so. Guests can be offered reduced housekeeping services, while technology can also have an impact, for example by providing check-in apps that reduce the need for front desk staff.

Running the room numbers

Technology has the potential to usher in even greater change. Ellis Adams Group founder and CEO Chris Adams thinks there is space for an Uber-style disrupter to shake up the hotel industry. If they can get results then the market will demand that everyone else follows suit.

Data is already being used to a far greater degree than it used to. Technology can help operators to track energy consumption, share of renewable energy and operational carbon monitoring.

“Lifecycle assessments are an excellent way of getting emissions data from the full lifecycle of a building,” says Thomas Laakso, CapMan Real Estate investment director.

Data can play a key role in quantifying progress in decarbonizing the sector, which remains a priority.

“We are always seeking improvement in this area,” says Azora Group senior partner Cristina Garcia-Peri.

The hospitality sector as a whole has started to become relevant again for real estate investors. Indeed, the $4.5 billion of funds targeting the sector is demonstrative of that.