It’s a very interesting time for the U.S. hospitality sector as the country nears the end of the Covid-19 pandemic. To find out how the lodging sector has performed in light of rapidly changing macroeconomic conditions, Green Street analyst Chris Darling, who also serves as the firm’s Lodging Sector head, sat down with Green Street's Content Manager Stacey Corso to discuss the three biggest trends lodging sector investors need to watch right now.

Darling covers seven publicly traded lodging REITs, provides shadow coverage on several Hotel C Corps, and has a comprehensive view of the hospitality real estate sector.

Here is an excerpt of the lodging investment sector interview with Chris Darling:

Content Manager: Chris, given your wealth of knowledge on the lodging investment sector, I was wondering if you could take us through the current conditions in the hospitality real estate market. What is the first trend for lodging investors should watch out for in a post-Covid environment?

Chris Darling:  Sure, would be happy to. As most people are probably well aware, the hotel industry has suffered through one of the worst downturns in its history. But at the same time the recovery over the past couple of years has been fairly robust. In fact, today overall U.S. RevPAR is actually above where it was at the same point in 2019. So, that’s encouraging from a high level, but if you look below the surface, there are still pockets of distress throughout the industry and probably the most notable example there is the performance of major urban markets.

Which in aggregate, these markets (are still performing) well below the pace that was set on a pre-Covid basis. And as you can imagine, this is largely due to still-sluggish business travel that has yet to fully normalize to pre-COVID levels.

New York City is a good example (of a market that’s currently underperforming). But speaking broadly for the industry, the potential for a meaningfully below-average supply growth environment, should go a long way towards mitigating some of the operational threats that we've discussed, whether it be the potential for higher inflation or the impact of less business travel over time.

The first trend, and I think arguably the most important for investors to keep an eye on is what the recovery of business travel ultimately does look like.

Certainly, there will always be value to in-person interactions. I don't think that's going away anytime soon, but I do think it's reasonable to expect less business travel and in a post-Covid world we've all grown accustomed to virtual interactions. We’ve proven as employees and employers that we're able to maintain productivity while working remotely. And frankly, there's a real cost to getting employees back out on the road both financially of course, but also in terms of the time commitment involved as well.

And so ultimately, Green Street expects a call it 10% to 15% reduction in business travel going forward. Certainly, it has a meaningful impact on lodging demand, though not necessarily an existential threat to the business at the end of the day.

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