NASHVILLE, Tennessee — There are signs that leisure travelers are beginning to pull back on their vacation spending as hotel rates have soared.
The hotel industry can pivot quickly during periods of high inflation, deftly setting higher nightly rates to maximize profitability even when rooms are left unsold. Consumers, meanwhile, might already be shifting their booking patterns to find value, opting for lower-priced hotel options than what they typically would have booked.
Hannah Smith, senior analyst at STR, CoStar's hospitality analytics division, researched several different U.S. markets for a presentation titled "Is Trade-Down Real? Insights Into Customer Search Behavior" during last month's Hotel Data Conference. She said the steady leisure demand waves in 2021 and 2022 as pandemic restrictions were lifted and consumers booked "revenge travel" have calmed throughout 2023.
"Nearly half of markets are seeing rate growth in excess of that inflationary growth. Consumers with the same budget in 2019 — even adjusted for inflation — are not able to afford the same hotels that they could a few years ago," Smith said. "That's true when we look at the individual hotel level as well. Forty percent of all hotels are more expensive — even accounting for inflation — than they were back in 2019."
Defining the 'Trade-Down Effect'
Travelers "trading down" means they're compromising part of their trip in some way to lower costs, Smith said. Maybe that means they're choosing a lower-tier, more affordable hotel in the same market or they're expanding their search to hotels outside of bustling downtown centers.
"Let's take Key West. We know that it's a super high-priced market, and it's only become more so over the past four years," Smith said. "Back in 2019, $220 could get you an upscale room in the market. When we adjust that for inflation today, you'll be staying in a midscale room. Your money is just not going as far, as you're having to change your buying habits if you're sitting there with the same budget that you had back in 2019.
"Another example is Portland, Maine. Here I want to focus on kind of geographic shifts. For $150 in 2019, you could stay in the downtown core of Portland, Maine. Today, that's just not possible. That's up to about $165 in the downtown area, adjusted for inflation, so you're going to be forced out to the suburbs if you have that same budget."
Customers trading down might also shorten trips by a day or two, changing flight or car rental plans or even considering different destinations altogether, Smith said.
Kevin Sahara, Expedia Group's director of market management, said booking surveys from 2021 showed that consumers valued hotel cleanliness and flexibility for their trips, including the option to cancel. These factors even outweighed the overall costs of the trip. But now, travelers are prioritizing trip costs and finding the best value, and that can lead to trading down for more affordable hotel options.
"Back in 2021, price actually fell behind full refunds and enhanced cleaning. We all remember a lot of cleaning procedures that went into place — that became heightened for the customer," Sahara said. "Full refunds and cancellations were at the top of the priority list, too, because government restrictions changed and trips could change based on what's happening with the pandemic. As we indexed that on what was the most important to the consumer, we started to see now that price is back at the top of consideration in 2023."
Location was also a factor in whether travelers booked at a higher class of hotel or sought to save on average daily rate by trading down and booking elsewhere. In Miami, the market's downtown area gained a 3% demand share over Miami Beach through May 2023 when compared to 2019, Smith said.
"As we've come out of 2020, that leisure boom, it seems like the consumer was willing to pay anything. But it seems like there was a small segment that wasn't willing to pay the premium that it cost to stay in South Beach or in Miami Beach," Smith said. "We actually did see the demand shift about 3 percentage points away from the beach and towards the downtown area. ... That's certainly not because there was some boom in business travel going to downtown Miami.
"That is the leisure traveler just moving to a slightly more affordable hotel a little bit further away from the beach. And this plays out when we overlay the pricing premium as well."
From Expedia's point of view, Sahara said customers who considered hotels in Miami Beach were willing to expand their search even outside the city to other Florida destinations, possibly to save on room rate and put that trip budget elsewhere.
"If they looked at Miami Beach and clicked and booked somewhere else, then where did it go? Some of it went to Miami or downtown Miami, or Fort Lauderdale," he said. "And then this is where it got a little weird and it went to Orlando, where now this is not even a beach vacation anymore; we're changing to Disney. And the other one was Key West. So two very different locations from Miami Beach versus just moving inland where a lot of the trip intent really changed. ... Maybe finding better value in another destination depending on what they're looking for."
In Colorado ski markets, upscale hotels grew their share of demand by 2% in 2023 over 2019, and while luxury hotels lost 3% of demand, average daily rate jumped from $465 pre-pandemic to $600 in 2023.
"Over the past four years, luxury [ADR] ... even adjusted for inflation, is almost $150 higher today than it was back in 2019," Smith said. "It's actually lost 3% of its demand share as they're seeing that high rate growth. And that could be a strategy on the hotels' part; they want to push rate and they're not as concerned about occupancy. We also don't know whether this is a true causation relationship."
The higher rates at Colorado's luxury ski resorts could also be in response to some loss of demand share to overseas destinations, Smith added.
"We know that a lot of ski tourists started to go back to their international ski destinations over the past ski season," she said.
Are Groups Also Trading Down?
Smith said a trade-down effect will take a bit longer to notice in the group demand segment, such as corporate groups booking events at hotels in a lower class, because of how far in advance large groups book hotel stays.
"It'll be interesting to look at a year from now — of the groups that are planning right now, maybe those are the more price-sensitive groups, [whether] they're getting a little concerned about travel budgets," Smith said. "We know that many travelers that are coming to conferences, coming with groups are perhaps making those decisions on their own, booking outside the block because of their own budgets at their own companies or their personal budgets. It'll be interesting to see in a year’s time if we are seeing a little bit of shift in those groups.
"But I also don't know how much we'll actually see it if the groups themselves are still keeping the group blocks at the upper-upscale [hotels] but then maybe individual travelers are shifting to upscale."