A New Horizon: The case for an inflationary bull market in hotel real estate

Executive Summary

• Profitability of hotels represented in the CBRE Trends¹® database outpaced inflation during the inflationary cycles of the 1940s and 1970s by an average of 315 basis points (bps) per year.
• From 1972-1982, hotel net operating income (NOI) grew faster than U.S. corporate earnings despite the higher risk associated with equities².
• Hotels represented in the CBRE Trends® database demonstrated a history of real NOI growth with a 155-bp premium versus inflation over nearly 50 years.

Inflation reached 8.5% in March 2022, the highest monthly rate since 1981. Many investors are concerned about what higher inflation means for hotel investment. Using our extensive Hotel Trends® database, CBRE analyzed performance during the prior inflationary cycles of the 1940s and 1970s.

¹ Trends® in the Hotel Industry (U.S. edition) is CBRE’s annual compilation of unit-level hotel financial statements. It provides an analysis of hotel revenues, expenses, and profits. The data is arrayed in a variety of property type, geographic location, rate, and size categories, thus allowing hotel owners and operators to benchmark the performance of their properties to industry-wide averages of a similar profile.
² Source: FRED, CBRE Trends® in the Hotel Industry.

Figure 1: U.S. Inflation Rate 1940-2020

Source: FRED.

Opportunities Through Inflation

During the years of most intense U.S. inflation (1972-1982), the U.S. consumer price index (CPI) increased at an 8.7% compound annual growth rate (CAGR). NOI achieved a 12.3% CAGR, significantly higher than the rate of inflation.

From 1941-1951, the 10-year period with the second highest inflation in U.S. recorded history, the U.S. CPI increased at a 5.9% CAGR. Hotel revenues, departmental and undistributed expenses, and gross operating profit (GOP) all grew at an 8.6% CAGR.

Historically, the hotel industry has proven to be inflation-resistant given its nightly “lease” structure and fixed-cost leverage leading to material real profit growth.

Source: CBRE Trends® in the Hotel Industry.
Note: NOI assumes a reserve of 4% of total revenue. Trends® database contains GOP-level data from 1938-2020. Trends® database contains NOI-level data from 1970-2020. ADR is average daily rate. RevPAR is revenue per available room.

High Growth with Low Beta

While fixed assets such as hotels are generally perceived as safer and lower-growth investments than equities, hotel NOI growth outperformed U.S. corporate earnings growth from 1972-1982. The hotels included in CBRE’s Hotel Trends® database increased NOI at a 12.3% CAGR compared with an 11.1% CAGR for corporate earnings.

Figure 2: Hotel NOI vs. Corporate Earnings Growth (Indexed to 1972)

Source: FRED, CBRE Trends® in the Hotel Industry.
Note: Corporate earnings is defined as: Nonfinancial Corporate Business; Earnings Before Interest and Tax (FSIs), Transactions, Millions of Dollars, Annual, Seasonally Adjusted Annual Rate.

Long-term Real NOI Growth

Historically, NOI growth outpaces inflation. From 1970-2019, hotel NOI has recorded a CAGR of 5.5%, a 155-bp annualized premium to inflation over a nearly 50-year period.

Figure 3: Hotel NOI Growth vs CPI (Indexed to 1970)

Source: FRED, CBRE Trends® in the Hotel Industry.

With inflation on the rise, the current economic cycle is beginning to show similarities with past cycles. If hotel performance follows the pattern set in past periods of high inflation, hotel investors can expect outsized NOI growth, particularly as occupancy bounces back to pre-COVID-19 levels.

CBRE Hotels welcomes conversation regarding these pieces. Please reach out to our team.