CAMBRIDGE, Mass. — Uncertainty causes people and businesses to pause.
If they’re unsure about what’s coming next, consumers are more likely to pull back on spending. For the hotel industry, that may translate to fewer or shorter trips and a slower, more cautious approach to transactions.
During a roundtable discussion with board members of the Hospitality Asset Managers Association, hotel industry executives spoke about the ongoing concern over hotel demand and why they expect to see fewer hotel deals this year.
Demand concerns
According to a spring survey conducted by HAMA of its membership, 65% of 80 respondents listed hotel demand as a top concern, coming roughly in line with 66.15% of 65 respondents who answered similarly in the fall survey. The survey was conducted roughly six weeks before HAMA held its spring conference on April 10 and 11.
Everyone typically looks at demand as being the primary concern in their hotels, said John Paulsen, senior vice president at HotelAVE.
“We want to make sure we have enough guests coming in, and obviously since COVID, we’re all very hyper-sensitive to that,” he said.
Hotel asset managers continue to anticipate bifurcation of demand between hotels in the higher chain-scale segments and properties in the lower end, said Chad Sorensen, managing director and CEO of CHMWarnick and president of HAMA. Travelers with more discretionary income to spend will continue to do so.
Full-service upper-upscale properties may take a hit on the leisure side, but those cater more to group and business travelers, he said.
“Group continues to support that part of the ecosystem and — knock on wood — we really haven’t seen major cracks in that demand, which is good,” he said. “But you’re thinking about it more, that extra reception, that [food and beverage] spend has just helped, and we’ve been able to exploit that.”
People want experiences now more than ever before, Sorensen said. As they traveled more after the pandemic, they saw different types of hotels and saw how they could fit into their desire for something new.
“This isn’t just a hotel at the corner of ‘walk and don’t walk.’ It’s an experience. It’s not just a great bed,” he said. “I think that bodes well for the industry. People will spend, but again, I do think it’s on the upper end.”
Some of HotelAVE’s hotels have dealt with cancellations from federal government-related groups, Paulsen said. The corporate lawyers went through their contracts and found they were not able to charge a cancellation fee because these groups lost their funding.
“They didn’t want to get into a longer, protracted legal battle, so we kind of gave up on that cancellation,” he said. “What they are trying to do is rebooking them for another time, hoping that their funding would get reinstated at some point.”
Everyone in the hotel industry is holding their breath on government-related demand, Sorensen said. It’s not like the floodgates have opened and all government-related business is canceled.
“There’s just a lot of discussions and waiting and seeing, which is a positive,” he said. “Uncertainty is not good for the industry, but there hasn’t been this huge tidal wave of cancellations.”
The whole inbound and outbound international demand equation is probably one of the biggest questions the U.S. hotel industry has right now, Sorensen said.
“We’re absolutely going to feel it with inbound,” he said. “We were feeling it already last year where outbound was outstripping inbound.”
However, at this point, Sorensen said he believes some U.S. travelers who would have travelled internationally this year will decide to stay closer to home because of the current geopolitical issues.
“The question would be, what’s that balance, and I don’t think we know,” he said.
Lower transaction volume
Among the 80 hotel asset managers surveyed, 63.75% responded they were actively pursuing acquisitions, down slightly from the 70.77% of 65 respondents who answered the fall 2024 survey. In the spring survey, 40.26% of 77 respondents said they expected cap rates to trend down fewer than 25 basis points over the next 12 months, up from the 33.85% of 65 respondents who felt similarly in the fall.
Four out of 80 respondents this spring said they had handed the keys of a hotel back to a lender or entered a forced sale situation since the fall survey. The fall survey reported one out of 65 had done the same since the spring 2024 survey.
There has been a noticeable sentiment of retreat on hotel deals, Sorensen said.
“Uncertainty and lack of a line of sight is very bad for real estate, hotels and owners,” he said. “I think that’s really what we’re seeing, is a lot of wait and see.”
There’s a gap between hotel buyers and sellers, and instead of pushing through it, people are taking a step back until they have a better view on the situation, he said.
When comparing the results of the spring and fall surveys, the percentage of asset managers worried about the Federal Reserve’s decisions on interest rates decreased, from 29.23% to 21.25%, Sorensen said.
“That goes back to line of sight,” he said. “We might not like the capital markets. We might not like the interest rate situation, but we kind of knew what the interest rate situation was going to be, or thought it was going to be.”
That has since gone “out the window” in the time between when the spring survey was conducted and the roundtable, but there was optimism at the time as people felt more certain about the situation, he said.
The deals process is complicated, and every hotel transaction is unique, so that means it’s not just “rinse and repeat” from one to the next, he said. All of this supports expectations for lower hotel transaction volume.
Some transactions will happen because they have to happen, but many would-be hotel buyers will explore other options, Paulsen said. They may invest their capital in their own hotels instead of buying another property.
“They might deploy it in their own assets to do those refurbishments, to do those things now, spend the money to get in position to sell it at some future date,” he said.
It’s a “retreat and batten down the hatches” strategy, Sorensen said.
“Take care of my own shop. Let some of this start to play out, which I think is a very different sentiment today than it was six weeks ago or seven weeks ago,” he said. “It’s a different 2025 today.”