Archives for January 2022

Fitch now anticipates RevPAR to recover to about 70% of 2019 levels in 2022, with most of the recovery happening in the second half of the year.

Fitch Ratings has lowered its outlook for the global lodging sector, citing the spread of the Omicron variant and the reintroduction of travel restrictions.

Those factors combined equate to weakened recovery prospects for revenue per available room, or RevPAR, for the first half of 2022. The impact of COVID-19 on international travel will force hotel operators to rely on domestic leisure travel and the eventual return of domestic business travel, the ratings agency said in a statement.

Fitch says it now anticipates RevPAR to recover to about 70% of 2019 levels in 2022, with most of the recovery happening in the second half of the year.

“Occupancy gains and rate performance in the US in 2021 were greater than we expected, but many countries in APAC and Europe remain subject to tighter mobility restrictions,” the firm said in a statement. “China, the largest contributor to global outbound tourism in 2019, will not have a meaningful recovery in international travel as long as it pursues its zero Covid-19 strategy.”

Fitch also expects the sector’s RevPAR to take at least four years to reach pre-pandemic levels, citing changing restrictions that limit visibility and mean hotel bookings are made last-minute, despite pent-up demand and high disposable income among consumer segments in most regions.

Leisure travel demand will likely continue to focus on holiday destinations, regional getaways, outdoor accommodations like campsite, and “self-sufficient” short-term rentals. Meanwhile, business travel appears to be recovering faster in the US than in other parts of the world.

“We expect urban destinations, especially in the upscale segment targeting business travelers, to remain under pressure as ‘return to office’ policies have again been delayed, due to Omicron, with limited local trips and almost no business gatherings,” Fitch analysts said in a statement. “New hybrid working models may blur the line between business and leisure travelling, leading to longer stays, but we expect demand for international business trips to remain fragile as corporates have shifted towards virtual events and videoconference meetings.”

Fitch also notes that more hotels were able to remain open in 2021 than in 2020, and they experienced lower losses thanks to greater abilities to absorb costs.

“Asset-light operators have generally proved more resilient than asset-heavy peers, with less-volatile profits, despite not having fully recovered incentive fees yet,” the Fitch report notes. “Inflation, tight labor markets, sharper competition from short-term rentals and the lack of public-sector support, such as furlough schemes, will pose new challenges in 2022, particularly for independent hotels with less financial flexibility.”

A report late last year from Moody’s Analytics similarly predicted that the hotel sector will face a “protracted recovery,” with experts maintaining that certain segments of business travel may never fully return to pre-pandemic levels. Moody’s expects permanent declines within the range of 10 and 30%, as would-be business travelers increasingly substitute technology for in-person meetings.

Source: “Fitch Ratings Lowers Outlook For Global Lodging Sector“

The Independent Restaurant Coalition’s January nationwide survey finds more than 1 in 4 without federal grants face eviction.

Many of the companies that did not receive Restaurant Revitalization Fund grants from the federal government during the pandemic are facing dire situations.

Nearly 60% of restaurants reported sales decreased by more than half in December 2021 during the Omicron surge.

Nearly 50% of businesses without federal grants were forced to lay off staff because of a COVID-19 related closure or lack of sales in December. This is only true for 33% of businesses that received RRF.

These data come from the Independent Restaurant Coalition (IRC), which last week released results from nearly 1,200 members of the independent restaurant and bar community in all 50 states.

The survey responses were collected in January and show the precarious situation facing small restaurants and bars as well as the impact of the Omicron variant in recent weeks.

“This data makes clear what we’ve been saying all along: independent restaurant and bar owners left out of the Restaurant Revitalization Fund are taking on massive debts, laying off employees, and selling personal assets to stay in operation,” Erika Polmar, executive director of the Independent Restaurant Coalition, said in prepared remarks.

The IRC measured independent restaurants’ difficulties in a variety of ways. It noted, for instance, that the Omicron variant is affecting restaurant reservations in cities around the country. Reservations in Brooklyn (68%), Chicago (72%), New Orleans (85%), and Los Angeles (52%) are far below their 2019 levels. And 58% of businesses reported that their sales decreased by more than half in December 2021.

It also reports that 28% of businesses that did not receive RRF grants have received or are anticipating receiving an eviction notice compared to just 10% that received RRF grants.

Also, restaurant and bar owners who did not receive an RRF grant are taking on more personal debt with 41% of people that did not receive RRF reported taking out new personal loans to support their businesses since February of 2020. This is only true for 19% of businesses that did receive an RRF grant.

At the same time, restaurants are taking measures to retain staff amid the Great Resignation. IRC found that  84% of all restaurants reported raising wages and that 37% of all businesses reported adding paid sick leave benefits for employees. Also, 21% of all employees reported starting to add paid vacation for employees.

Source: “Restaurants and Bars Face Bankruptcies, Evictions Without Federal Relief“

The top CEOs, CIOs and strategists point to logistics, Sunbelt multifamily, and outdoor industrial storage.

JP Morgan sees an array of sectors in the US that are benefiting from high user demand and will perform well in 2022, according to its 4th annual Global Alternatives Outlook.

The report is based on the opinions of CEOs, CIOs and strategists from J.P. Morgan’s $200 billion-plus alternatives platform. It provides a 12- to 18-month perspective on the trends influencing their respective markets, as well as their most promising investment ideas and their thoughts on the underappreciated risks investors may face.

Logistics, Multifamily, Outdoor Industrial Storage Top the List

Logistics properties (particularly infill logistics assets in the so-called last mile between urban storage facilities and consumers); suburban multi-family and single-family housing in Sunbelt states; campus-like clusters (or nodes) of amenity-rich offices for the technology sector; and industrial outdoor storage facilities (including truck terminals, parking and equipment storage) in key urban locations, are set to flourish.

Deeper into 2022, JP Morgan believes that “contrarian investment opportunities in stressed corporate and retail subsectors may start to emerge,” according to the report. “Leasing markets for offices are likely to recover slowly, potentially creating refinancing challenges for asset owners. If declines in asset values overshoot the intrinsic development costs associated with these properties, opportunistic investments in offices may become highly attractive.”

Although contrarian plays are already apparent in retail, this sector is very different, JP Morgan’s report stated.

“Maintaining a focus on quality is essential. Our argument for highly selective retail investing has been validated, somewhat paradoxically, by the pandemic: Retail assets in top locations that have benefited from significant capital investment are thriving, while poor-quality assets are failing. The chasm between the two appears destined to grow wider in the months ahead.

Core US Real Estate in ‘Sweet Spot’

Economic growth and inflation create a “sweet spot” for core real estate in the US, the report said.

“The outlook for economic growth remains strong while the cost of capital is still cheap,” JP Morgan stated. “Historically low interest rates and rising inflation are currently supportive of asset class valuations. Investors need to take heed, however, because these favorable conditions may not last.”

Cash flow-generating assets are likely to become increasingly expensive in 2022 as the real estate market becomes more crowded, according to the report.

“Since the economic recovery began in late 2020, we have seen unprecedented fundraising by non-traded private real estate investment trusts (REITs) and an acceleration of institutional portfolio rebalancing, which always lags behind spikes in the value of equity and fixed income portfolios,” JP Morgan said. “As investors come under increasing pressure to find yield-producing assets, we expect to see capital flows into real estate increase sharply.”

At the same time, long-term megatrends, such as the surging popularity of e-commerce transactions and, in the US, population migration to Sunbelt states, continue to drive demand for niche real estate assets, according to the report.

Source: “JP Morgan Picks Its Best CRE Categories For Investment“

Increased costs from climate change, the supply chain crisis and inflation are just some of the reasons.

Commercial insurance prices are rising as increased costs from climate change, the supply chain crisis and inflation take hold, Westchester, a commercial property, and casualty insurance underwriter, said in a new report.

Climate change is adding to the expenses insurers need to recoup and plan for, said the authors, as related natural disasters produce more frequent and severe insured water, rainfall, and flood losses.

Also, the supply chain crisis is making repairs to commercial properties more expensive with higher costs for construction materials like lumber, steel, and gypsum.

Another factor is inflation, which is driving up costs as well.

These factors are now colliding with the long-standing trend of undervaluing the true cost of asset replacement for property insurance purposes, the authors said.

Accurately and comprehensively valuing the replacement cost of a commercial structure for insurance purposes, is a difficult process that is critical to ensuring that insureds are paid accurately and quickly in the event of losses, they pointed out.

“More accurate valuations would generate improved modeling, enhanced risk management of assets and business continuity, and more precise pricing of property risks, among other benefits,” the Westchester authors urged.

The Impact of Climate Change

Expanding on the impact of climate change on commercial property insurance rates, they noted that from January through September 2021, rising global temperatures appeared to have contributed to 18 weather related disasters with losses exceeding $1 billion each in the US, a record high.

“The greater frequency of severe catastrophic events over the past 5 years have redefined this ‘new normal’ on an almost annual basis,” the authors asserted.

Judging the risks on existing catastrophe models, they warned, may create a false sense of security.

Costs Are More Volatile

The supply chain crisis, the Westchester experts cautioned, has made the costs to rebuild damaged or destroyed buildings more volatile.

The massive upsurge in strong end-market demand caused by the pandemic made it impossible for suppliers, container ships, railcars, and trucks to serve everyone’s needs simultaneously, causing shipment delays and transportation disruptions, the report said.

The authors are predicting the tight availability of commodities and building materials will contribute to further price increases well into 2022.

Asset Replacement Costs

Rising material and labor charges with the current inflation strongly suggests that asset replacement costs are presently undervalued in property underwriting models, the authors cautioned.

“Inadequate consideration of asset replacement costs has an adverse effect on insurer modeling, pricing, business continuity plans, and the duration of claims adjustment and payment,” they said.

The costs for the insured of rebuilding or replacing a building with materials of like kind and quality and the building’s contents including furniture, fixtures, machinery and inventory, require more diligent valuations and proper reporting by insureds and brokers during the underwriting process to ensure there is sufficient coverage in the event of an insurance claim, the authors advised.

AI Won’t Help

While artificial intelligence and machine learning technologies have improved the estimations of property insurance losses from natural disasters, the report said the models’ forward-looking projections strain to account for the increased frequency in nonconforming weather events, seesawing damage repair costs, and longer-duration business interruptions caused by both wide scale and prolonged power outages.

Without accurate projections of potential losses, the Westchester authors cautioned, senior management at commercial property building principals may fail to set aside enough capital to cover the organization’s retained risks or may procure property insurance with insufficient coverage limits.

To better understand the changing risks, the report said each party needs to examine in depth and detail how they can in their respective roles develop more accurate and near-real-time data on building condition, local drainage systems, real estate, and housing development trends, access to available construction materials and local construction personnel, and other loss exposure information.

“In light of a future with more frequent and severe catastrophic weather events and related insured losses, the property insurance industry should consider providing policyholders greater support for taking certain risk mitigation measures. That support may include potential

premium discounts or credits for protective measures such as improving the insulation of buildings and pipes, retrofitting storm drainage systems, and installing electrical generators for unexpected electrical outages,” the report concludes.

Source: “Why CRE Insurance Prices Are Becoming More Volatile“