Historically, the hotel sector has recovered from every crisis, as seen most recently in 2009/2010. After the Lehman crash, which triggered a huge collapse in business travel and conference activity, operators scaled down, cut costs, let employees go (sometimes on a massive scale) and only hung onto the rest with the aid of short-term working schemes.

2020 was different. Covid-19 proved to be much more aggressive and above all unpredictable. The pandemic didn’t just change one industry, it broke the mould. And yet hotels proved surprisingly resilient during the coronavirus crisis. “Some operators got a black eye, but the predicted wave of bankruptcies failed to materialise,” says Martin Schaller, Head of Asset Management Hospitality at Union Investment. He concludes that the market shakeout in the corporate hotel segment expected at the start of the crisis is not happening. “Quite the opposite, in fact. Market penetration by hotel chains is actually accelerating.”

There is no structural problem with hotels as such, confirms Ascan Kókai, Head of Hotels at ECE Real Estate Partners: “The crisis has merely compressed existing long-term changes.” But the intensity of the pandemic is also forcing a rethink, mainly around hotel development and in terms of business hotel concepts. “Innovative concepts and financially strong lessees will benefit from the recovery, which creates an opportunity for agreeing solid, long-term partnerships,” adds Kókai.

Staff shortages are hitting fullservice concepts particularly hard and will drive further change in the hotel market.

Hybrid forms blur the boundaries

Accordingly, new and updated operator concepts are coming to the fore. Mix and match is the name of the game. “The boundaries between different uses are set to become even more fluid,” predicts Andreas Löcher, Head of Investment Management Hospitality at Union Investment. Since coronavirus, many business travellers have become used to the convenience offered by a serviced apartment. A bed plus kitchenette provides more privacy than a bed plus restaurant. Existing extended-stay brands are getting even more creative, with low personnel and service costs boosting resilience during the crisis. More demand, more providers and more concepts do however require “a surer instinct than before in selecting the right location and concept,” emphasises Anett Gregorius, managing director of Apartmentservice Consulting.

The boom in this mini segment opens up further scope for expansion by the significantly larger hotel industry. Since last autumn, hoteliers have been ramping up existing extended-stay brands (with plans to double capacity), creating completely new brands or making Group-wide and global statements. Accor, for example, has added the tag “Living” to all its brands. Even budget chain Motel One launched its first twelve serviced apartments with kitchenettes in its new hotel on Hamburg’s Fleetinsel island in mid-July. 

Die zu Beginn der Krise erwartete große Marktbereinigung im Corporate-Hotel-Segment findet nicht statt. Im Gegenteil: Die Marktdurchdringung der Kettenhotellerie beschleunigt sich sogar.

Hospitality is thus melding with residential. New hybrid forms are emerging: hotel home office, hotel coworking, hotel coliving, living hospitality (residential assets with a hotel touch), senior living (residences with a hospitality lifestyle for “silver agers”) and even healthcare facilities with a hospitality feel. 

These trends have the potential to disrupt the conservative end of the hotel spectrum, although Martin Schaffer, Managing Partner at MRP hotel, does warn that “it’s actually just like pre-Covid – everyone is chasing the same niches with the same copy/paste mentality.” Closer scrutiny by the banks could put a stop to that, though. Financiers are taking a much more critical view of investors and operators and have become far more selective when funding hotels. That is certainly the main response from Deutsche Hypo, DZ Hyp and Bayern LB, three German banks engaged in financing commercial real estate, although their detailed strategies differ.

The banking sector has become more cautious during the pandemic

Uwe Niemann, Head of Hotel Finance at Deutsche Hypo: “We know that hotel operators are currently having a hard time demonstrating the required strong credit rating. Our strategy is to hold the investor liable instead. They need to guarantee that loans will be serviced.” At the other extreme, real estate bank DZ Hyp is avoiding hotels altogether during the pandemic, but continues to monitor the industry. Its hotel loan book currently amounts to around €3 billion. Uwe Barth, head of credit risk management for corporate clients at DZ Hyp’s Frankfurt-based Real Estate Centre, remains sanguine. “With hotel assets, the operator’s ongoing reporting provides insights into the business model, making it possible to carry out a more accurate risk assessment. To date, hotels have thus been no riskier than other asset classes,” he notes. 

Bayern LB restricts itself to well-funded operators who disclose their performance figures. It also checks their record on paying back state-sponsored Covid loans. The bank analyses the leases of established and new operators alike and is watching new tech-driven operators such as Limehome and Numa (formerly Cosi), who have deep-pocketed venture capitalists behind them. These new players, with strategies that feature contactless check-in and no on-site staff, have yet to prove their hospitality credentials but investors and banks are attracted by the ROI prospects.

Investors are still working on plans and projects

Peter Ebertz, partner at Cologne-based investor and fund initiator Art-Invest Real Estate, prefers to think in terms of opportunities rather than categories. “For us, locations have to be unique and benefit from diversified demand,” he says, citing the example of the Moxy Hotel operated by Ghotel at Cologne Bonn Airport, which handles both cargo and passenger traffic and is thus more crisis resistant. The hotel’s location was the main attraction, with its direct link to Terminal 1 and a roof terrace overlooking the runway. During the summer, it emerged that hotel chains and individual hotels alike have lost around a third of their employees due to multiple lockdowns. “That makes slimmer and smarter ways of doing things even more important than before the crisis,” comments Reiner Nittka, CEO of German hotel developer and investor GBI. “Staff shortages are hitting full-service concepts particularly hard and will drive further change in the hotel market,” he says. “And when it comes to financing, cash is king.” Reiner Nittka adds that, like Union Investment, GBI will continue to focus on extended-stay products. The company’s “smartments” have hugely outperformed conventional hotels, operating at 25 to 45 percent of capacity during lockdown, compared with just 10 to 15 percent for hotels, according to data from STR. However, GBI is also looking at operators more closely, demanding safeguards and guarantees from them or their parent companies as well as a higher lease coverage ratio (now 2.0 rather than 1.5 previously). For his part, Peter Ebertz believes that the hype around serviced apartments is set to cool down: “Post-pandemic, travellers won’t want to hide in their rooms any more – they will be eager to enjoy local restaurants and bars and get the buzz of street life.” He adds that finance will remain the bottleneck for future developments. Mid-sized and smaller businesses without a strong financial backbone will find it hard, or harder, to expand like in the past.

Innovative concepts and financially strong lessees will benefit from the recovery, which creates an opportunity for agreeing solid, long-term partnerships.

Specialist providers can jointly operate mixed-use spaces

Christoph Cellarius, team leader for project development at Groß & Partner, a Frankfurt-based property developer, likewise recognises that extended-stay formats have fared better during the pandemic. He expects operators in general to differentiate themselves more as they look to the future, specifically by way of flexible room sizes, high usage elasticity, new work options and strong positioning. Art-Invest is taking that much further. After its Hotel Manage to Core fund bought Sofitel’s Alter Wall hotel in Hamburg, the concept was completely flipped. The conference area is being ripped out and a new build constructed on the large forecourt as part of a compact mixed-use development. 

Martin Schaller of Union Investment also sees another trend: “The question will be what contribution can a hotel make to a functioning mixed-use ensemble or neighbourhood.” He expects specialist providers and operators to increasingly join forces to operate spaces. 

There’s no crystal ball to show which of these different approaches will succeed. That leads Cellarius to ask “whether the run on concrete gold and the associated ticket sizes are starting to outstrip invest or demand, and where the saturation point lies."

By Maria Pütz-Willems