The U.S. economy is expected to slow next year while the hotel industry continues to recover and grow.
In a presentation during the PKF Hospitality Group's virtual 196+ Summit Americas 2023, Jan Freitag, national director of hospitality market analytics for CoStar, said hotel demand is expected to grow 1.8% in 2024.
That demand growth should translate to occupancy growth of 1% because hotel supply growth won’t be a big headwind for the industry, he said. In the past, the hotel industry has overbuilt heading into a downturn, but this time the higher interest rate environment is contributing to limited new supply of hotels.
The long-term average for supply growth is 2.1%, but the 2024 forecast is 0.8%, Freitag said. Room rate growth of 4.2% this year and 3% next year are basically at the current level of inflation. That means revenue per available room is expected to grow 4.8% this year and 4% in 2024, a “good conservative measure” given Oxford Economics forecasting zero GDP growth in the first two quarters of next year, he said.
In October, U.S. hotel industry room demand declined, so occupancy fell, Freitag said. The industry is selling 65%, or roughly two-thirds, of its rooms at a rate that is 3% higher than it was a year ago, so there’s still RevPAR growth. Earlier this year, the industry benefited from strong revenue growth due to easier comparisons from the year before.
The problem is the ADR percent change, he said. When overlaid against the consumer price index, costs have gone up faster than hotels have raised rates.
“Hotels historically have been seen as a hedge to inflation because obviously we set our prices every night,” he said. “Hoteliers have not really done that well.”
Rate and Demand Recovery
ADR at luxury hotels is declining, Freitag said. People are still staying at luxury hotels, but the guests have shifted from staying at more expensive resorts with four-digit room rates to “cheaper” luxury downtown rooms, he said.
“This is purely math,” he said. “This has nothing to do with discounting.”
The upper-upscale segment has done well thanks to group demand’s recovery, he said. Group has recovered to the point that more group rooms were sold in October this year than in 2019, he said. Seasonality is coming back with acceleration in the spring, a lull in the summer and then its return in September and October.
Corporate transient is "back-ish" depending on the market, Freitag said.
Economy hotels are in a rough spot, but the full extent of the deceleration of occupancy hides behind the amount of economy hotel room supply being taken out of inventory, he said.
“On the economy side, we’re not just losing guests, we’re also losing hotels,” he said.
U.S. Department of Commerce data collected from the airlines shows the number of Americans traveling internationally outnumbered the international inbound travelers, Freitag said. That’s what hurt a lot of the U.S. resorts this summer.
“We’re going abroad more than we did in 2019,” he said.
The hope is that everyone who traveled overseas this year will decide to stay stateside in 2024, he said.
“Maybe next summer, people are saying, ‘Look, I was just in Rome, I don’t have to go there,’” he said.
What’s critical for downtown market recovery is return to the office, Freitag said. A survey conducted by Challenger, Gray & Christmas found that the largest share of companies, about one-third, require three days of work in the office. Roughly 10% require five days.
“I don’t think that we will ever be in the office on a Friday again ever,” he said.
The hybrid work model compresses the amount of time people are working in the office together, he said. That also potentially condenses the time that employees travel. That could mean the top 25 markets see more compression on Tuesdays, Wednesdays and Thursdays than before, leading to more pricing power.
Real Estate Update
Construction of new hotels compared to last year is basically flat because of the properties breaking ground and backfilling for the hotels that are opening, Freitag said. That said, owners who have the land, have the brand and have the design ready to go are still running into problems getting their projects financed. Many are decided to hold off in the final planning stage, causing those numbers to balloon, but some of those will fall to the wayside.
Those hotels that do open will do so in 2025 and 2026, so it will be a slow trickling of new supply, he said.
As for what’s in the pipeline, it’s not much of a surprise, Freitag said. Owners and developers are focusing on upscale and upper-midscale hotels.
“Owners love them. Developers love them. Guests love them. The brands love them,” he said. “That is where the action is, and that’s what you actually can get financed.”
Coming out of the pandemic, there was a lot of pent-up demand for hotel deals, but that has decelerated, Freitag said. There was roughly $6.3 billion in hotel transactions during the third quarter of this year, down 40% from a year ago.
“I don’t see a catalyst in [the fourth quarter,]” he said. “I don’t see a catalyst in [the first quarter], so it’ll be interesting to see when that changes.”
A likely trigger for that is when the Federal Reserve commits to ending its rate increases or says it will cut interest rates, he said. That will lead to a lot of capital sitting on the sidelines to do deals, but those deals aren’t necessarily going to be ones of distress.
While it’s only one data point, the commercial mortgage-backed securities delinquency rates have stayed solid at 5% and will likely continue to stay there, he said.
When it comes to refinancing, the best lender is the current lender, he said. Banks are not in the business of owning hotels, so they will figure out a way with their borrowers to redo the capital stack to avoid any delinquency. Situations such as Park Hotels & Resorts giving back keys to two San Francisco hotels are the outliers.
The reality is there's not a lot of distress coming, he said.
“This whole wall of distress narrative that everybody's thinking about for ’21 and ’22 is just not happening,” he said.
*Correction: The story has been updated to clarify a quote about hotel distress.