How much will hotel stocks recover?

Hotels were among last year’s worst performers as travel dried up during pandemic lockdowns. The sector’s recovery will offer clues about how deeply Covid-19 has altered consumer behaviour, portfolio manager Larry Antonatos says.

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A key metric for the hotel industry is revenue per available room. In the U.S. that dropped more than 75% year over year early in the pandemic before improving to a 50% decline by December, said Antonatos, managing director and portfolio manager at Brookfield Asset Management’s Public Securities Group in Chicago.

As hotel cash flows plummeted, so did share prices. But hotel stocks have rallied since November as part of the broader reopening trade, Antonatos said, making hotels one of the leading sectors since Covid-19 vaccines were approved.

“Now, as lockdowns ease and vaccination rates increase, we should look more closely at the hotel sector to understand the potential impacts of long-term behavioural changes resulting from Covid-19,” Antonatos said in a late-February interview.

China provides a window, since it went into lockdown before the rest of the world and reopened sooner too. The severity of the lockdown meant an even greater decline for Chinese hotels: year-over-year revenue per available room declined roughly 95% in February 2020, Antonatos said, but by December it was basically flat.

“We expect the rest of the world will follow the recovery trajectory of China,” he said.

Pent-up demand will drive an immediate spike in leisure travel, Antonatos said. While the improvement will eventually taper off, he said he expects a full recovery in leisure travel to pre-Covid levels. Business travel will also recover but to “modestly lower levels” as technology permanently replaces some face-to-face meetings.

Other real estate sectors

While hotel stocks have rebounded since November, office real estate has underperformed.

We see tremendous value in the office sector today,” Antonatos said. “This is based on our view that, while work from home has been a successful short-term solution, we think that in the long run work from home will ultimately be a supplement to — rather than a substitute for — the office.”

The pandemic may also halt a movement toward more crowded work spaces. “In the past two decades, office space per employee has decreased from 425 square feet to about 150 square feet,” Antonatos said. “We think this will reverse, driving some increase in office demand.”

While the stocks of companies that own office space were hit last year, Antonatos said office values and company cash flows held up relatively well, especially in major markets.

The big pandemic winner in real estate has been the industrial sector. While brick-and-mortar retailers have suffered through temporary closures, industrial real estate benefited from a rise in online shopping.

Industrial real estate company stocks performed extremely well in 2020, Antonatos said. They’ve lagged in the reopening trade but he sees long-term value in the sector.

“Unlike the work-from-home phenomenon, which will be reversed by moving back to the office, we think internet retail is here to stay,” he said.

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