A slump in tourism hasn’t led to investors checking out of hotel real estate. Hotel REITs are rallying on investor bets that rate cuts, luxury spending, and non-room revenue will keep the lights on.
The sector is up by 12.7% in the last month, out pacing the S&P 500’s monthly gain of 3.3%.
Geographic diversification, resilient luxury spending and company strategies to capture more spending beyond bookings have helped the industry’s performance. Many operators are leaning on restaurants, spas, resort fees, and other amenities to blunt softer demand. But the bulk of the gain has been predicated on investor bets that lower borrowing costs could spur more real estate transactions and kickstart consumer spending.
“It has nothing to do with what is going on here and now with hotel fundamentals or frankly any company’s fundamentals,” said Michael Bellisario, Baird’s Senior Research Analyst who covers real estate. “The view is interest rates will be lower; therefore that could be stimulative to consumers.”
The U.S. is set to lose $12.5 billion in international visitor spending in 2025, according to the The World Travel & Tourism Council. This is driven mostly by political factors: reports of foreign visitors being detained by immigration and negative feelings toward the Trump administration are chilling the tourism industry. DOGE firings have also cut into travel business, said Kenneth Billingsley, an analyst at Compass Point Research and Trading.
Even so, some regional pockets remain strong. A crackdown on Airbnb in New York City has helped drive a jump in room prices, up 7% from two years ago, according to CoStar. Since REITs are a collection of real estate assets and are not constrained by one location, the geographic diversity of these trusts’ hotels has allowed them to weather the change in travel, according to Billingsley.
“Hotel REITs are well-positioned for long-term growth, especially those with diverse portfolios and prime locations,” said Hoya Capital, a REIT investment advisor, in an article on their website.
The biggest gainer has been Host Hotels and Resorts, which is up 8% this month closing Friday at $17.42. This is because of its focus on luxury properties, since high end consumer spending has held steady. “The business traveler and the day traveler, those people are tending to watch what they’re spending a little bit more,” said Billingsley. “The person looking to go have a resort experience may not be feeling the wallet as tight.”
He added that once hotels get customers in the door, they’re spending more within the resort. “Whether it’s through the restaurants, through the spa, resort fees, they are able to capture more dollars that aren’t directly tied to the room.”
Host’s wins have kept the larger sector afloat, due to its market share. “As we view the sector, we sort of view Host,” said Bellisario.
Other hotel REITs with more of a focus on business travelers aren’t weathering the current storm as well. Billingsley pointed to Apple Hospitality, closing Friday at $12.50, and RLJ Lodging, closing Friday at $7.67, doing worse than Host as a result of their product mix being more dependent on transient business travel.
Additionally, REITs need to pay back out their taxable income as a dividend, which makes it attractive to investors.
“Great dividend & buybacks ! Solid company! Use it to balance growth stocks!” said one retail investor on Seeking Alpha.
But Bellisario believes the greatest factor keeping hotel REITs afloat is the dangling carrot of lower interest rates. For consumers, “there’ll be more dollars in their pockets that they could spend on discretionary purchases, such as travel,” said Bellisario. But the benefits on the demand side will take a while to trickle down to the hotels’ bottom lines. The real upside is a more liquid real estate market.
Real estate transactions have been slow in recent months, and the gap between what buyers want to pay and what sellers want to sell for is wide, which is slowing things down more. With lower rates, buyers and sellers may start meeting closer on price, leading to more deals. Once the market starts moving, REITs will be able to take advantage, either buying properties at attractive prices or selling to realize gains.
“At the end of the day these are real estate companies,” said Bellisario. “It’s a collection of assets, but the real estate’s worth the real estate if they were to sell it.”