The impact of COVID-19 on the hospitality industry has been well-documented; pity the hotel owners and operators who, finally seeing a light at the end of the tunnel, found instead a looming energy crisis, rising interest rates, collapsed consumer confidence, and rampant inflation.

The Global Business Travel Association recently predicted that corporate travel won't fully return until mid-2026, 18 months later than the trade group had previously forecast. Whilst STR predicts a RevPar recovery to 2019 levels in late-2022, this will be small comfort in the context of high inflation, and increased labour, financing and material costs. Although leisure travel has now recovered to 2019 levels, consumer caution and increased costs of living will almost certainly dampen that trend.

The impact of these latest developments is likely to reinforce the industry trends (both defensive and opportunistic) which arose during the pandemic. These include:

  • The Rise of "Hybrid Hospitality". Frustratingly difficult to define, "hybrid" properties have emerged as one of the biggest trends since the pandemic, benefiting hugely from the increase in working from home ("WFH") and the so-called "digital nomads" – those with laptops and the ability to work from anywhere. Mixed-use properties certainly existed pre-COVID, but they have evolved considerably from the early lifestyle hotels which marketed themselves to millennials in need of good wifi and a funky coffee bar. Increasingly, many can be considered a cross between the best of the serviced apartment and serviced office products, offering flexible accommodation and office services, together with restaurants, bars, fitness facilities, and community-based events. Crucially they are social spaces as well, as they are often the substitute for offices in which social interaction would have normally taken place. For an owner, the properties offer the promise of diverse client and revenue channels, and more efficient use of space. Ennismore – whose "Working from Hoxton" product is one of the industry leaders – has recently announced that it is extending the "Working from . . ." concept to its other brands, a sure sign of confidence in the continuing viability of the product.
  • Office Conversions. As The Times recently reported, WFH has "emptied city centres". Vacancy rates in New York have doubled to more than 20%, with central London following a similar path. Combined with the cost of complying with regulatory requirements regarding energy efficiency and increased financing costs, the commercial property sector is suffering. Conversion to hotels or mixed-use – or often sale to an owner contemplating a conversion – is increasingly appealing, particularly in city-centre locations where greenfield development opportunities are limited.
  • Secondary and Tertiary Locations. Carrying on from both of these trends are opportunities in locations on the outskirts of major cities. If employees are not required to commute to the office in London, for example, a hybrid space in Wimbledon, Reading or Chelmsford becomes an interesting opportunity.
  • Branded Residential. The number of branded residential products increased materially in the years prior to the pandemic, with developers focused on the potential for an early return of capital investment and the major brands happy to exploit the license fees and increased operating revenue generated by these properties. This trend seems to have accelerated, however, with increased demand from more affluent "nomads" seeking to secure a base, often in what would have been previously considered a holiday destination. Once largely limited to luxury brands such as Four Seasons, Ritz Carlton and Fairmont (with several of the major brands avoiding the products due to the perceived risks), nearly every major operating company now has a branded residential offering. Interestingly, the properties on offer are no longer limited to luxury, with mid-market brands such as Novotel being used on projects in the Middle East and Asia.
  • The Delay of Digitisation. It was accepted thinking just a few years ago that hotel rooms would become largely digitised -- hotel guests would be able to check-in, unlock their hotel room door, order room service and control the air conditioning all from a mobile phone app. The technology to do this (and much more) exists, and has become more impressive and cost effective. The capital investment required by both hotel owners and the major brands has proven a major obstacle in the face of the pandemic, however, and to date none of the major brands has introduced an integrated digital product for their owners.
  • Fewer Developments. The impact of increased financing, material and labour costs will have a significant impact on pending hotel development, with many projects no longer financially feasible. CBRE estimates that new supply in the industry will increase at a compound annual growth rate of 1.2% per annum over the next five years, down from a historical growth rate of 1.8% per annum.

Where does this then leave the industry? There will certainly be investment opportunities for those with capital (and perhaps a longer-term investment horizon), as hotels and office buildings become subject to distressed sales. Similarly, operating companies who show flexibility to owners of struggling properties, and propose creative alternative revenue streams, will be well positioned when a normal hospitality market returns. With the current challenges likely to continue for some time, agility and adaptability will be the keys to success.


Robert Asher

Of Counsel