The Evolution of Hospitality as an Alternative Investment: Why Hotels Are Gaining Strength Over Traditional Real Estate
By Eric Berman
Hospitality’s Growing Appeal in Alternative Investments
Alternative investments have long provided institutional and high-net-worth investors ways to diversify their portfolios beyond traditional equities and fixed-income assets. Real estate, historically a core component of alternative investments, is undergoing a transformation. As office spaces struggle with remote work adoption and retail properties continue to be challenged by e-commerce disruption, hospitality investments, particularly in leisure-driven markets, are proving resilient.
In Puerto Rico and across the Caribbean, the hospitality sector has emerged as one of the strongest-performing real estate asset classes, driven by strong travel demand, supply constraints, and government-backed incentives. This shift presents an opportunity for investors seeking exposure to real estate while mitigating some risks associated with other asset classes.
Hotels vs. Traditional Real Estate: A Comparative Look at Performance
While office and retail properties have suffered declining demand, the hospitality sector has rebounded strongly, particularly in upper-upscale and luxury segments, along with lifestyle-oriented boutique hotels. According to recent data from STR (2024), global RevPAR (Revenue per Available Room) has increased significantly, driven by robust growth in high-end and leisure-oriented hotels. Puerto Rico, in particular, has experienced notable performance improvements, with increases in ADR (Average Daily Rate) and occupancy levels surpassing pre-pandemic benchmarks.
Unlike traditional real estate assets, hotels offer greater flexibility in navigating economic fluctuations due to their adaptable business models. This adaptability contrasts with office and retail properties, which often have fixed lease structures that can become liabilities during downturns.
Puerto Rico and the Caribbean: A Unique Advantage
Puerto Rico and the broader Caribbean region benefit from a stable tourism base largely fueled by U.S. travelers. As a U.S. territory, Puerto Rico removes common travel barriers, such as passport requirements and currency exchange issues, making it highly attractive for domestic travelers seeking convenient, premium experiences. This reliable tourism stream provides investors with predictable, more recession-resistant revenues, especially in the luxury segement.
Moreover, Puerto Rico offers unique advantages through government-backed initiatives such as tourism tax credits and investment incentives, significantly reducing traditional equity risk. These incentives create a compelling case for hospitality investors compared to other Caribbean destinations.
Investment Strategies Aligned with Evolving Market Dynamics
Current hospitality investment strategies increasingly reflect evolving market dynamics and changing investor objectives. High-end hospitality segments, such as upper-upscale and luxury hotels, as well as lifestyle-oriented boutique properties, are particularly attractive to investors due to their long-term appreciation potential and resilient demand profiles. Investors are actively shifting their capital towards these segments, given their capacity to deliver superior returns through value appreciation and strategic repositioning.
As hospitality markets mature, investors are progressively adopting value-add and opportunistic investment strategies, targeting properties that offer significant upside through renovation, rebranding, operational improvements, or strategic repositioning. Such strategies have demonstrated the ability to deliver outsized returns compared to core or stabilized assets, which typically yield lower but more predictable returns.
Institutional Investors Recognize the Potential
Historically, private investors and specialized real estate funds have dominated hospitality investments. Recently, institutional investors such as pension funds and sovereign wealth funds are increasing their allocations to this sector. Global hotel transaction volumes continue to rise, with significant investor interest concentrated in upper-upscale, luxury, and lifestyle-oriented segments due to their resilience, strong market fundamentals, and potential for attractive returns.
Institutional investors appreciate hospitality’s ability to diversify portfolio risk while maintaining operational flexibility, enabling efficient management of economic fluctuations through proactive investment management and targeted market strategies.
Profit Margins and Segment Performance
Profit margins in hospitality vary significantly by segment. Limited-service and select-service hotels generally offer higher operating profit margins due to reduced labor requirements and minimal overhead from limited food and beverage operations. Conversely, upper-upscale, luxury, and lifestyle-oriented hotels typically incur higher operational costs due to extensive amenities and enhanced service standards, resulting in comparatively lower margin percentages.
However, these premium segments generate substantially higher absolute revenues, provide greater potential for long-term capital appreciation, and attract investors focused on both income generation and asset value growth. Consequently, despite lower margin percentages, upper-upscale, luxury, and lifestyle-oriented properties frequently deliver higher overall returns, particularly in prime leisure markets like Puerto Rico.
The Role of Government Incentives in De-Risking Investments
Puerto Rico’s robust incentive programs play a crucial role in making hospitality investments financially attractive. The island’s Tourism Tax Credit Program significantly mitigates development risks by offering substantial tax credits against eligible development costs which typically result in earlier liquidity events, accelerated depreciation schedules, and various tax exemptions on property, municipal taxes, and imported construction materials.
Additionally, Puerto Rico’s Act 60 provides further incentives to hospitality businesses, enhancing investor returns and facilitating entry into the market.
Capital Markets and Investment Strategies: Hospitality’s Competitive Edge
Hospitality investments currently offer distinct advantages within capital markets compared to other real estate asset classes. The flexibility inherent in hotel investments allows for responsive management of market fluctuations, thereby optimizing returns and mitigating risks. In economic downturns or periods of inflation, hospitality assets provide unique advantages due to their adaptable operating models and resilience.
Moreover, hospitality assets increasingly attract sophisticated investors through strategies such as acquiring distressed properties, debt acquisitions, and value-add repositioning. Distressed asset acquisitions and opportunistic investments offer investors significant upside potential through targeted improvements, operational enhancements, and strategic market repositioning. These value-add strategies are particularly compelling in today’s market environment, where hospitality assets can be acquired at attractive valuations with strong future growth potential.
A Strategic Opportunity in Alternative Investments
As traditional real estate sectors face ongoing challenges, hospitality investments stand out as resilient and increasingly attractive alternatives. Puerto Rico, specifically, presents investors with compelling opportunities due to strong demand fundamentals, attractive government incentives, and its unique positioning in high-end and experiential travel markets. Investors who recognize and act upon these strategic opportunities, particularly through value-add and opportunistic approaches, will likely achieve significant returns, solidifying hospitality’s role as a critical component of alternative investment portfolios.
Eric Berman
Managing Partner
Vivant Capital
Vivant Capital is a private equity and asset management firm focused on alternative investments, namely hospitality and commercial real estate, in Latin America and the Caribbean.
Vivant provides the opportunity for individual accredited investors, family offices, and private funds to invest in hospitality real estate projects with a stable value proposition and a high potential for appreciation.
