There are several things for the hotel industry to ponder as the fourth quarter of 2023 begins.

Let's dive in to consider the impact of inflation on average daily rate, how group demand might recover, and more.

In this “higher-for-longer” interest rate environment, there are as many data sets pointing toward a looming recession as there are against it. But for now, the CoStar Group house call is for a recession, precipitated by the higher interest rate environment.

The main reason for the U.S. Federal Reserve's actions is higher consumer prices, and the annualized change in the consumer price index, or CPI, has reacted as desired and slowed dramatically from a year ago. But, for now, the number is still above the Fed’s target rate.

Traditionally, hotel industry participants were able to translate their higher operating costs into higher average daily room rate, or ADR, since operators can reset rates each night. For the 28 days ending September 30, the ADR change was 2.5% and the forecast for the fourth quarter is for 1.5% growth. The resulting full-year growth rate would likely be well below the annualized CPI growth result.

Let’s see if ADR can grow faster than CPI, in a recession no less, to allow owners to grow their bottom lines.
 

Over the last year, corporate and association group demand has returned strongly, fueled by the need for in-person meetings. As growth in office occupancies remains muted, according to Kastle data, there is a stronger need to get teams together in the same ballroom and the midweek group occupancies bear that out. Monthly group occupancies have inched closer and closer to their 2019 comparable results, and in August, group room demand was only 400,000 rooms below August 2019 demand.

Talking to industry participants reveals good forward-looking booking pace, but also a very short booking window, making forecasting for properties difficult.

Looking at the demand trajectory over the last few months, we expect year-over-year demand growth for October group rooms, and maybe even results that equal pre-pandemic sales.

Higher interest rates make construction loans much more expensive and the number of hotel rooms in construction in the U.S. is slowing because of this. Over the last few quarters, the monthly construction count has oscillated between 150,000 and 160,000 rooms, implying that projects that opened were substituted by developments that moved from the final planning phase and broke ground. But the last count of rooms in construction in August stood at 145,000.

It is likely that more expensive loans are now forcing developers to go back to the negotiating table, be it to raise more equity or to value engineer their assets. If the number of projects continue to open at the current pace, there is a high likelihood that construction counts will further decline while the projects in the final planning phase balloon.

While this is not good news for developers, the outcome for the industry is likely going to be lower supply growth into 2025.
 

In addition to smaller construction numbers, the volume of asset transactions will likely also continue to be affected by the higher interest rate environment. In the third quarter, over $6.4 billion of hotel assets were traded, but this was a decline of around 50% from a year ago. Trades are taking place, but at elevated cap rates, and owners who do not have to sell remain on the sidelines until all parties have a better sense of capital market conditions.

The expected “wall of distress” has not materialized over the last few quarters. Loan sales are more common than outright foreclosure sales. On the CMBS side, loans are being further extended if possible. These themes will drive the lack of trading activity in the fourth quarter. Traditionally, however, there has been a notable uptick in deal volume as the year comes to an end, and this could lead to continued trades that push the volume above the third-quarter results.

The U.S. Centers for Disease Control and Prevention tracks new COVID-19 hospitalizations on a weekly basis, and the count has tripled from around 6,300 in mid-June to around 19,000 in late September. The prior peak was in January of this year with around 44,000 new hospitalizations per week. Easy access to vaccines and multiple waves of vaccinations have worked to give at least one dose to 81.4% of the U.S. population. According to the CDC, just over 676 million shots have been administered, but only 69.5% of the population has gotten the complete primary series and only 17% have gotten a booster since the fall of 2022.

Despite these strong vaccination numbers, the current increase in hospitalizations could put meeting planners on edge as they try to manage their events. Many attendees may choose to mask up again as they travel and attend indoor events with large crowds. Some attendees will miss events because they, or a loved one, will get infected. I think the days of requiring tests or proof of vaccinations are behind us, but COVID-19 infections will likely increase as we enter the fall and winter months. Corporate travel managers and meeting planners need to be prepared.

Jan Freitag is the national director for hospitality market analytics at CoStar.

The opinions expressed in this column do not necessarily reflect the opinions of Hotel News Now or CoStar Group and its affiliated companies. Bloggers published on this site are given the freedom to express views that may be controversial, but our goal is to provoke thought and constructive discussion within our reader community. Please feel free to contact an editor with any questions or concern.

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