The COVID-19 pandemic is making hotel owners reevaluate their strategies either because of the challenges the pandemic has caused or the opportunities it has created.

The Hotel Asset Managers Association has released its Spring 2021 Industry Outlook Survey, providing insight into the experiences and expectations of asset managers and the owners they work with.

Of the responding asset managers, roughly two-thirds said they did not plan on changing brands or management companies. The remaining third indicated they were, breaking down to 5% for brand changes, 10% for management changes and 15% for both.

The number of respondents saying they were looking at brand or management changes suggests there’s some unhappiness, said Larry Trabulsi, executive vice president at CHMWarnick. Within his portfolio, some of his clients have been busier with requests for proposals than they have been in the past.

“It’s definitely a sign of the volatility in the market right now,” he said.

Owners who have been working with their lenders to keep their properties have been resetting their investment strategies, which is part of a bigger initiative to review all their hotels, said Chad Sorensen, managing director and chief operating officer at CHMWarnick. They’re taking another look whether their properties are branded properly or have the right third-party management structure.

“This has presented an opportunity for ownership groups to really try to figure out what the best positioning and structure looks like going forward,” he said.

Many owners are looking at keeping their brands but switching to the franchise model, dropping the brand management and bringing in a third-party manager. The pandemic has shown a light on the cost structures on the front end, and brands were generally more expensive and less flexible than third-party managers, Sorensen said.

There haven’t been many independent hotels joining brands lately, said David Danieli, senior vice president of asset management at Pebblebrook Hotel Trust. His company deflagged its Hilton Mission Bay in January 2020 to make it the independent San Diego Mission Bay Resort, and he believes more hoteliers will make similar moves. The conversion occurred before the pandemic started, but the now-independent property is well-positioned for the recovery.

When Pebblebrook partnered with third-party management companies to form the Curator Collection for independent and small-brand lifestyle hotels, the goal was to provide these hotels with purchasing power and better leverage with vendors and online travel agencies, he said. That purchasing and negotiating power previously worked to the brands’ advantage, making them more appealing to owners.

“You're going to see there's opportunity for owners to leverage a platform like Curator and be able to move away from some of the traditional branding options that have been available,” Danieli said.

Traditionally, there’s been an occupancy premium by being part of a brand, but now, there might only be a few percentage points of difference between neighboring branded and independent properties, Trabulsi said.

“It's tricky in such low-occupancy environments, and it's tough to say the flag is driving added incremental value with these levels,” he said.

Regarding debt, the survey results showed more than 30% of those with commercial mortgage-backed securities debt reported lenders were no more or less flexible. For non-CMBS, roughly 45% reported the same. More than 10% with non-CMBS debt said lenders were more flexible, but only about 5% of those with CMBS debt said the same. In contrast, more than 15% of those with non-CMBS debt said lenders were less flexible while 9% of those with CMBS debt said the same.

About 75% of respondents said they did not plan to hand keys back to their lender or enter into a forced sale situation. Approximately 15% said that they would, and nearly 10% said they already had.

While there has been some distress and some foreclosure activity, there hasn’t been nearly as much as everyone might have expected, Trabulsi said.

“There’s signs there’s still distress out there,” he said. “The shoe may not have fully dropped as of yet, but there still are some headwinds here as market conditions start to recover. There's still a lot of work to be done.”

The wave of distress didn’t materialize as people anticipated, Sorensen said. There will continue to be workouts this year and next year, he said.

Nearly 80% of respondents said they were actively pursuing acquisitions. For full-service and luxury properties in urban markets, more than 40% expected to see discounts of 11% to 20% of 2019 values. For similar property types in resort locations, more than 50% expected to see discounts of zero to 10% compared to 2019 values.

The overwhelming number of respondents pursuing deals is indicative of the amount of capital available on the sidelines, Trabulsi said. Many are hoping to come in and buy hotels at a discount.

“We are seeing in a lot of markets where something of quality comes to market, there are discounts to pre-COVID levels, but the amount of capital that’s available is helping to prop up interest and therefore propping up some of the values,” he said.

There are many investors from outside the industry looking for an opportunity in the hotel space. They are coming in with the expectations that the hotel industry has been hammered and can buy a trophy property for 30% to 40% off its 2019 value, Trabulsi said.

“We're already seeing non-traditional players coming in trying to get into the market,” he said. “Now that there's so much capital out there, they're competing for deals when they come up.”

Many of the regular players in this space are focused on off-market deals, Sorensen said. They know in every recovery period there’s new sources of capital, creating a competitive environment.

“I think we’ll continue to see more off-market transactions, especially for high-quality assets,” he said.

One such deal was Host Hotels & Resorts’ acquisition of the Hyatt Regency Austin. Kerry Gaber, market vice president of asset management at Host, said that deal came about through a relationship between her company and the seller.

There are a lot of people with capital who want to get into the hotel industry but haven’t before, she said. They’ll dip in where they feel there’s an opportunity while those who have more experience in the space don’t feel the stretch is worth it.

“It’s going to be interesting to see who continues to acquire in this space right now as we continue to look at a vast amount of acquisitions, but the discounts are nowhere near what the forward-looking risks are as you look at things like labor,” she said.