A view of Barcelona from the roof of the Mandarin Oriental hotel. (© Mandarin Oriental Hotel Group)

A view of Barcelona from the roof of the Mandarin Oriental hotel. (© Mandarin Oriental Hotel Group)

In the old hotels of Madrid and Barcelona, business is thriving. Room revenues were up more than 10 percent in the past year and occupancy is strong as tourists flock to Spain’s cobblestone streets, tapas bars, and old museums. Even the country’s beach resorts, which saw their values nosedive after the 2008 economic crash, were posting stronger numbers and drawing tentative interest from investors.

Eight hundred miles (1,300 km) to the north in Paris, however, the story is different. In the wake of terrorist attacks and refugee issues, hotel occupancy was down 11.9 percent through the first three quarters of 2016 compared with the same period a year earlier, and revenue per available room (RevPAR) was off more than 15 percent, according to STR Global, a London-based hotel data benchmarking firm. In response, the French government is promising to spend millions to revive the tourism industry.

Europe is a divided continent in many ways. While markets like Spain, Portugal, and Croatia are experiencing a surge in visitors, France, Belgium, and Turkey face a tourism crisis. The continent is displaying vastly different performances from country to country.

In many areas, tourism-related development is at a standstill amid the European Union’s economic turmoil. But cities like Munich and Zurich are in the midst of significant spurts of hotel development. Frankfurt alone will see its supply of hotel rooms increase by more than 15 percent over the next four years, according to HVS, a global hotel valuation and appraisal consultancy.

Cities across Europe are in “different points in the cycle,” says Sophie Perret, director of HVS-London and a chair of ULI’s Hotel and Resort Council. “People tend to think of Europe as one massive market.”

Trying to read the tea leaves to determine the impact of the trends swirling around the European tourism industry can be daunting. From Britain’s Brexit vote and changes coming with the new Trump administration in the United States to the European Central Bank charging negative interest rates and ongoing concerns over terrorism, the industry is awash in uncertainty and undergoing fundamental changes. Travelers increasingly are turning to Airbnb and similar home-sharing services across the continent, presenting the hotel industry with new competition. Cap rates are shrinking. And everyone continues to puzzle through what the millennials really want. Analysts differ on the short-term prospects and opportunities presented by these uncertainties, but they generally agree on one thing: it is definitely not a time for business as usual.

Tourist Volume

One thing has not changed: people are still traveling. Arrivals to Europe have been growing at a steady 4 percent per year since 2010, with 2016 expected to register record numbers once all the numbers are tallied. “Even though people are cutting back, travel remains a top discretionary priority,” says Brandie Wright, a research analyst with Phocuswright, a New York–based travel industry research firm.

But significant shifts have taken place in how people are traveling in Europe, experts say. The bulk of tourism in Europe is still domestic—among countries within the European Union—and experts report that these travelers are growing more conservative and staying closer to home. “We’re seeing more travelers in the travel pool, but they’re traveling less often,” says Wright, who primarily focuses on France, Germany, and the United Kingdom. “But they’re taking longer trips when they do travel.”

European travelers are also technologically savvy and have become increasingly cost-conscious, says Caroline Bremner, head of travel research at Euromonitor International, an international market research firm. More than 70 percent of flights in Europe are now booked online, and travel sales booked through mobile devices have grown from $3 billion in 2010 to $40 billion in 2016, according to Euromonitor. “Pricing is very transparent, and consumers will spend many weeks, if not months, researching their trip before making the final purchase,” Bremner says.

The motivation for traveling is also changing. Travelers are shifting away from “material possessions towards an interest in actual experiences,” focused on their increasingly healthy lifestyles, Euromonitor concluded in the recent World Travel Market Global Trends Report 2016. However, because many busy Europeans do not have time for traditional, time-consuming adventures like safaris and mountain climbing, they are opting for “micro-adventures,” such as hiking and kayaking trips, the firm says.

Shopping Expeditions

For international tourists visiting Europe, shopping is a growing driver, especially among travelers from Asia. Shopping typically accounts for 15 to 20 percent of inbound tourist receipts in Europe, Bremner says, with the baseline typically running higher in Scandinavia, especially in Finland, Norway, and Sweden, where shopping often represents more than 20 percent of trip spending, she says. The growth rate for shopping expenditures is gaining most in southern Europe. “In terms of growth, inbound spending on shopping is outpacing total inbound spending,” she says, especially in destinations like France, Italy, Greece, and Spain that have a strong presence of retail and luxury brands.

A new breed of destination shopping center is developing, catering in part to leisure travelers, says Coralie Marti, senior consultant with Horwath HTL, a global hospitality consultancy. The key targets are Chinese travelers, who already are the biggest spenders in travel, according to the United Nations World Travel Organization.

“Chinese are increasingly looking for destinations where they can shop,” Marti says. Destination malls such as the Bicester Village outside London and the La Vallée Village near Disneyland Paris attract thousands of Chinese visitors a day. “It is an actual phenomenon—the reinvention of shopping malls around leisure,” Marti says.

With Europeans staying closer to home, developers are creating more destinations—some that include shopping venues and theme parks. “There has been a very significant investment in leisure parks,” Marti says.

Among the largest projects in development is Europa City, a 200-acre (81 ha) retail and entertainment project outside Paris, anchored by 2.5 million square feet (230,000 sq m) of retail space and a 1.6 million-square-foot (150,000 sq m) amusement park. Shopping center developer Immochan, with more than 400 centers in Europe and Asia, hopes to break ground in 2017 on the $3 billion project, which includes an investment from China’s Dalian Wanda Group.

In Rome, the Cinecittà World amusement park, focused on Italy’s famed movie studio, opened in 2014. “It would seem that Italians have an appetite for leisure parks,” Marti says.

New Branding Models

Hotel companies are scrambling to react to the various shifts in the market. Around Europe, more niche and lifestyle brands are targeting specific demographics. Almost all the major chains have invested in new budget-oriented lifestyle brands, such as Marriott’s two-year-old, millennial-focused Moxy, which offers “cozy rooms” and “cool, energetic, communal spaces.” Barcelona-based Axel Hotels, which targets the lesbian/gay/bisexual/transgender community, plans to open ten hotels in Europe over the next three years.

“People are looking for something new,” says Jessica Jahns, head of Europe/Middle East/Asia (EMEA) hotels and hospitality research at JLL. “Younger people want something a bit different and a bit quirky.”

© Mandarin Oriental Hotel Group

The Madrid Ritz, one of Spain’s most famous hotels, was purchased in 2015 by Mandarin Oriental and a Saudi Arabian group for €130 million (US$137 million). (© Mandarin Oriental Hotel Group)

French chain AccorHotels has been aggressively expanding its interests in different industry segments. In 2016, the company bought upscale sharing site Onefinestay for €148 million (US$157 million) and acquired a 30 percent stake in Germany-based 25hours Hotels, a chain of design-oriented boutique hotels. In September, the company launched Jo & Joe, a new brand targeting millennials with a combination of hotels and hostels. A product of the company’s new Marketing Innovation Lab, 50 Jo & Joes are slated to be opened by Accor in the next three years.

“Brands are trying to get a little more nimble, less corporate,” says Aaron Greenman, executive vice president of EMEA acquisitions and development for Arlington, Virginia–based Interstate Hotels & Resorts.

Every hotel company is trying to gauge the impact and appropriate response to Airbnb and other varieties of home-sharing services, which continue to attract travelers. Europe has a long tradition of home sharing and communal hostels, and Europeans are eagerly embracing the lodging-sharing concept. “Hotels will have to evolve and become more sexy and appealing,” Perret says.

In the United Kingdom, 42 percent of Airbnb properties are actually “pseudo-hotels,” Ufi Ibrahim, British Hospitality Association chief executive officer, said at a recent conference. The top 1,000 U.K. Airbnb hosts earn £169 million ($214 million) a year, according to the association’s research.

Around Europe, the hotel industry and community groups have been fighting back against this new source of competition, with many cities enacting regulations to curb the tourism apartments. In Berlin, where affordable housing is a key issue, the city has banned short-term rentals. Other cities have moved to restrict the length of stays and impose taxes on the apartment rentals.

However, it remains difficult to determine the effect of the Airbnb phenomenon on the hospitality industry. Many hotel companies continue to post strong numbers. Overall, occupancy in Europe was flat through the first three quarters of 2016 compared with a year earlier, while the average daily room rate and RevPAR were both down 3.3 percent, STR found.

But the overall numbers do not reflect what analysts call the increasing polarization of the industry in Europe. For example, Dublin reported a 19.4 percent increase in RevPAR in the first three quarters of 2016 compared with a year earlier, while Milan saw a 14.1 percent decline, according to STR data. Copenhagen was up 16.3 percent, but Brussels was down 23 percent after a horrific run of violence. “There no way to tell when you recover after something like that,” says Greenman, who is based in Brussels.

Investor Attitudes

The Madrid Ritz, one of Spain’s most famous hotels, was purchased in 2015 by Mandarin Oriental and a Saudi Arabian group for €130 million (US$137 million). (© Mandarin Oriental Hotel Group)

The Madrid Ritz, one of Spain’s most famous hotels, was purchased in 2015 by Mandarin Oriental and a Saudi Arabian group for €130 million (US$137 million). (© Mandarin Oriental Hotel Group)

While many big projects are moving forward, investment in hotels across Europe has slowed dramatically in the past year. Many investors are in a wait-and-see mode, analysts say. “Uncertainty never really helps,” Greenman says. “The story has been about uncertainty for six years.”

Through the first three quarters of 2016, €11.6 billion ($12.3 billion) in hotel deals had been recorded in Europe, less than half the total for the same period of 2015, according to JLL Hotels & Hospitality Group. The 2015 total, €31.4 billion ($33 million), was something of an anomaly—several large portfolio deals boosted the numbers, experts say—but there were still fundamental shifts in activity in 2016.

In 2016, private equity firms were sellers, not buyers. Through the first three quarters of 2016, private equity’s share of total transactions fell to 21 percent from 42 percent a year earlier, according to JLL data.

“In 2016, private equity firms have started selling off portfolios they bought early in the cycle,” Jahns says. Sovereign wealth funds accounted for 12 percent of investment in European hotels in 2015, but through the first three quarters of 2016, they registered no investments, according to JLL. “With the change in oil prices, sovereign wealth funds may have also refocused their investments strategies,” Jahns says.

There also has been a shift in the origin of investment in European hotels, from international to domestic European sources. In 2015, 48 percent of the deals originated in the Middle East, Asia, and North America; in 2016, the same regions accounted for only 15 percent of deals, according to JLL data. Internal investments within Europe represented 23 percent of deals in 2016, up from 8 percent the previous year.

In Spain, one of the most active markets, new rules approved by the government in 2012 for real estate investment trusts (REITs), known as a SOCIMIs (sociedades anónimas cotizadas de inversión inmobiliaria), have made it easier for international firms and domestic funds to invest in portfolios of Spanish property. SOCIMIs accounted for a large share of the €1.5 billion ($1.6 billion) in deals in the first three quarters, JLL reports.

Investors are looking for yield, and they are moving beyond the traditional markets to find it.

In surveys for the Emerging Trends in Real Estate® Europe 2017 report, published by ULI and PwC, industry leaders cited hotels as their favorite alternative real estate investment, with a “preference for leased assets rather than those with a management contract in which there is more operational risk,” the report says. Italy, Portugal, Denmark, Poland, and Spain are among the markets attracting attention for their growth and relatively low prices compared with the traditional tourism centers.

“Spain has become a great place for an opportunistic investor to buy existing assets,” says Christophe de Bruyn, the Barcelona-based director of tourism and leisure for Indra Business Consulting. Most of the focus is still on cities, with investors looking for deals in the depressed markets, he says.

But many investors have clearly put European hotels on hold as they wait for both the economic and political landscapes to settle, experts say. The notable exception is interest in trophy assets in the gateway cities, which continues despite concerns that the market may have peaked. In 2016, Dubai-based Al Habtoor Group paid $78.8 million for the 138-room Hotel Imperial Vienna, which was built in 1863; and Henderson Park, a London-based fund backed by the Kuwait Investment Authority, among others, paid a reported €365 million ($388 million) for the 1,025-room Le Meridien Etoile, the largest hotel in Paris.

“I’m always astonished by the appetite for trophy assets, and that’s not going away,” Perret says. “They defy logic.”

Economic Trends

Trends that shook the market in 2016 are sure to affect the European tourism market in the years ahead. The United Kingdom’s Brexit vote in June sent quakes through every level of the European economy and started a movement that could—in the most extreme scenario—end the European Union.

However, in the short term, Brexit may have helped U.K. tourism. The drop in value of the British pound made the United Kingdom a much more affordable destination. “The U.K. as a destination is now much more competitive in terms of price,” says Bremner. August was a record month for inbound visitors, according to Britain’s Office of National Statistics.

Despite the turmoil, several positive factors have appeared on the horizon. For investors, Germany has replaced the United Kingdom as Europe’s top real estate safe haven, according to Emerging Trends Europe. Berlin, Hamburg, and Frankfurt were cited as the top cities for investment. In a recent report, HVS spotlighted Barcelona, Copenhagen, Lisbon, Madrid, and Prague as cities poised for growth.

And then there is the China factor. In addition to China representing the world’s fastest-growing group of tourists, Chinese companies likely will continue to aggressively invest in the European travel industry. In the past two years alone, Chinese firms bought France’s Louvre Hotels Group and resort owner Club Med, and invested in U.K.-based travel company Thomas Cook, among other investments. Chinese investors are investing “in the whole tourism value chain” in Europe, infusing liquidity into the market, de Bruyn says.

Any sort of economic turnaround will boost the number of travelers to most markets, analysts note. A pullback on valuations could spark another wave of investment. And a new wave of supersonic jets might link Europe to distinct locales, Euromonitor says.

More than anything, tourists like Europe, analysts say. “The big trends are not changing,” Marti says. “Europe will still be among the top destinations in the world.”

Kevin Brass writes regularly for the New York Times International Edition and the Financial Times.