President Trump’s move to bar large institutional investors from buying additional single-family homes is aimed at affordability, but it’s the kind of headline that makes institutional investors across all asset classes pause. On Jan. 20, Trump signed an executive order directing federal agencies to restrict federal programs from supporting large institutional investors’ purchases of single-family homes, formalizing what had previously been a policy signal.
The reason for this is twofold.
On the one hand, it raises a yellow flag for institutional capital more broadly, making others wonder if the next policy move may impact their industry and/or investments.
Then there’s what they say about when one door closes. If institutional investors are out of the single-family rental (SFR) game, does that mean they – and their capital – jump into hotels?
Jan Freitag, national director for hospitality market analytics at CoStar, says…maybe.
“Commercial real estate investors are constantly weighing the different ROI expectations each asset class brings,” he explains.
ROI expectations are certainly front and center. Institutional capital doesn’t like uncertainty - and it doesn’t like having doors closed. If one of the most scalable rental strategies in the market starts to look more complicated, it stands to reason that those holding the purse strings may start looking for the next best place to park their money.
The question for hospitality, then, becomes whether certain hotel categories and markets offer the kind of risk-adjusted returns that make them a realistic substitute if single-family homes become a tougher trade.
Hotels vs. housing
The leap from housing to hotels is, in some ways, a logical one.
“I believe that whenever there are constraints of any sort in one sector, whether those constraints are caused by the economy, government, policy, geopolitical events, a pandemic, technology, or shifting tastes and risks, other sectors will benefit from that shift,” says Evan Weiss, co-founder, COO and principal of LW Hospitality Advisors.
But there is also one fundamental truth he knows about the hotel industry.
“Hospitality investing is not for the faint of heart,” Weiss adds.
Stan Kozlowski, principal at CooperWynn, notes that there are key differences between the two sectors, not the least of which are the operating models. He describes the SFR market as a financing business with limited property management layered on top.
“You lease homes for 12 months, collect rent and your biggest operational decisions are maintenance timing and renewal pricing,” Kozlowski explains.
Then there are hotels…
“Hotels are a full-contact operating business with daily revenue management, potential food and beverage operations, labor-intensive service delivery and brand compliance requirements for branded assets,” he continues. “You're not collecting rent – you're running a business with 365 nightly lease decisions per room, per year. The skill sets are apples and plastic bananas.”
There’s also the risk-adjusted return profile to consider. Kozlowski believes hotels can “absolutely” deliver higher returns, but those come with significantly higher volatility. RevPAR, for example, can swing 20 to 30 percent in a downturn, he notes, while the cost of labor remains high.
Meanwhile, SFR investors typically underwrite to a steadier, predictable cash flow that includes occupancy in the mid-90 percent range, annual lease escalations and minimal management intensity.
The issue of control is another one that comes into play.
“SFR investors have near-total control over their assets,” Kozlowski continues. “In branded hotels, you're in a partnership with a franchise company that dictates everything from the shower curtains to the breakfast offering and can mandate capital expenditures through Property Improvement Plans that materially impact your returns over your hold period.”
Still, Kozlowski sees the potential for some of this SFR capital to flow into hotels, but only if the investor is already familiar with the hospitality game.
“Sophisticated institutional groups that already understand hospitality, directly or through partnerships, will probably lean in further,” he says. “But the idea that SFR capital broadly redirects into hotels? I just don't see it.”
The extended-stay play
Alan X. Reay, president of Atlas Hospitality Group, believes one hotel segment may garner special attention from SFR investors if this ban goes through.
“I see institutional investors that are interested in rental income looking at extended-stay hotels that can quickly and economically be converted to residential rentals,” he says.
He believes this may be a particularly smart play in certain California cities that are under pressure to create more affordable housing, though there’s still a risk that cities could cap rents and annual increases.
Kozlowski can also see a path from SFR to hospitality via the extended-stay route if the investor starts with a single asset, selects something “operationally simpler” like an extended-stay hotel and partners with an experienced management company. He further recommends that SFR investors recalibrate their return expectations since hotels can deliver higher yields, but the path is bumpier and the capital requirements are less predictable.
“Lastly, recognize that you're entering a relationship-driven business where the established players have real advantages with brands, lenders and operators,” he continues. “That gap doesn't close quickly, so surround yourself with advisors who already have those relationships and be humble about what you don't know.”
Of course, hotels aren’t the only game in town. Many experts believe SFR investors are likely to jump into more like-minded assets.
“I would imagine that multifamily, healthcare, senior living and student housing are considerably more similar asset classes and would likely attract their attention,” Weiss says. “That said, if these folks do shift some of their additional investable capital to lodging, it could enhance the apartment lodging sector, with brands such as AMB by Marriott, Hilton’s new Apartment Collective collaboration with Placemakr and firms such as Kasa experiencing strong growth.”
In terms of ROI, Freitag also sees data centers, power plants and infrastructure plays as “very attractive” areas of focus.
There is also the option where money is simply pulled off the table…for now.
“Most successful institutional money is disciplined,” Kozlowski explains. “It doesn't chase alternatives just because the primary strategy got harder. If they are not historically in hotels, most allocators will sit on the sidelines until a new thesis clearly pencils within their primary asset classes, the team has the right expertise and the risk-adjusted returns justify the learning curve.”
Nevertheless, Kozlowski knows there may be an inflection point where it makes sense for SFR investors to learn the hotel playbook.
“What I'm seeing among the institutional groups that do have meaningful exposure to both asset classes is a deeper focus further into hotels rather than expand SFR allocations,” he says. “Hotels offer better transparency on operations, a clearer path to value-add through renovations and brand conversions and, frankly, they're a more liquid asset class.”