In years past, hoteliers have feared the prospect of a recession and what that means for hotel demand.
At this year’s Hotel Data Conference, a travel industry economist and hotel industry leaders said that even though they expect recession to arrive later this year, it will be mild and short-lived.
A revised 2023 U.S. hotel industry forecast from STR, CoStar’s hospitality analytics firm, lays out a slight decline in revenue per available room growth but strong rate projections and the expectation that occupancy growth will return next year.
Economic Outlook
There’s an economic slowdown expected to hit later this year, said Adam Sacks, president of Tourism Economics, an Oxford Economics company. That’s despite unemployment levels being at a 50-year low alongside rising wages pacing ahead of inflation in recent months.
Consumers are still worried, though, he said. The biggest problem they face is inflation cutting into their disposable income.
However, inflation will continue to temper, Sacks said. There’s disinflation in import prices, so the cost of purchasing supplies abroad for manufacturers and services providers is coming down. Rents are starting to drop, but there’s a lag due to the lengths of leases, so the effect won’t be seen right away.
The Federal Reserve is determined to get inflation to its target, Sacks said. The effects of this are most clear in the housing market, with mortgage rates nearing 7% for a 30-year, fixed-rate mortgage.
Households are feeling the strain of these higher prices, and they’re starting to take on more debt, he said. It’s happening across every income category, except for those in the top 1%. Lending standards overall are also tightening.
That U.S. treasury securities experiencing the “inverted yield curve” is another warning sign of a recession, he said.
All these factors combine to indicate a recession by the end of this year leading into the first quarter of 2024, Sacks said. It’s expected to be mild, however.
One main reason for that is there are no glaring balance sheet imbalances for consumers, corporations, state governments or local governments. The other is that the labor market is expected to be “uniquely affected in a very limited way,” he said. The expectation is that unemployment could reach 5.1%, up from the current 3.5%, which is not a high level of unemployment compared to past recessions.
In response to these factors, lodging demand in the U.S. has started to soften relative to 2019, Sacks said. The second quarter gave up some ground compared to 2019, and some of that is traceable back to income groups.
At the same time, air travel is holding at just above 2019 levels week after week, he said. Airfare is relatively inexpensive compared to historical pricing, and prices decreased further in July.
Past recessions show a four-times relationship between the decline of U.S. gross domestic product and hotel room demand, Sacks said. A 1% drop in GDP would normally equate to a 4% decline in room demand.
The current situation, however, indicates that may not happen, he said. Consumer spending on durable and non-durable goods has plateaued or dipped, but spending on services, which includes hotels, is well below the long-term trends, meaning it hasn’t found normal yet.
“Perhaps there is upside here just in a reversion to the way that things used to be and perhaps ought to be,” he said.
Leisure travelers' savings remain a buffer and should keep them in the game, he said.
Remote-work flexibility is also an overall benefit to the travel and hospitality industry, Sacks said. The number of days worked from home grew from 5% before the pandemic to 28%, more than 1 in 4 days. Thirty-four percent of leisure travelers said they plan to travel while they work remotely. Airbnb has said its guests are extending typical weekend stays a night or two over the shoulder days.
People who work remotely do need to meet with colleagues still, he said. A recent survey found that 58% of remote workers plan to meet their colleagues in person at least quarterly.
Business travelers are expected to travel more over the next six months than they did in the fourth quarter of last year, he said.
Outbound international travel is more than fully recovered while inbound is still well behind, Sacks said. That amounts to about a $47 billion in lost spending compared to 2019, which translates to about 38 million room nights, roughly 2.9% of 2023 room demand.
That will change, he said; the imbalance will narrow and flip back to a surplus by the end of 2024.
“Even as a recession comes on the scene, we expect room demand to grow and to narrow the gap, working its way back to normal,” he said.
Revised Forecast
The latest forecast for U.S. hotel performance reflects lowered expectations for growth, STR President Amanda Hite said. It’s not a meaningful change, however. Revenue per available room is projected to grow at a rate of 4.5% for full-year 2023 to $97.56 — a half a percent downgrade from the previous forecast.
“The bulk of the growth happened in the first part of the year,” she said. “We’ve already seen it. As we look at the first two quarters and what we have forecasted, demand came in right at where we had forecasted every month or below.”
Demanded ended up a little lower than expected in the first half, but rates came in a bit stronger, she said.
The majority of the industry’s growth this year has come from the luxury and upper-upscale segments, Hite said. Conversely, it’s been a more challenging year for growth in the economy and midscale segments. Moving into 2024, however, there should be RevPAR gains across the board.
The remainder of 2023 will be tough as growth will come through rates, not occupancy, she said. That will continue into part of 2024.
“That’s what you have to remember for the rest of the year and then into ’24,” she said. “The second half of ’24, really starting in the second quarter before, that’s where we’re going to start to see a lot more occupancy gain to get out of the economic downturn, recession or whatever happens.”
Breaking it down by segment, the forecast for the luxury and upper-upscale segments aligns with what Host Hotels & Resorts has laid out in its full-year guidance, said Deanne Brand, senior vice president of strategy, enterprise analytics and treasurer at Host.
The recovery of group demand for hotels has been a tailwind for the company, she said, adding that groups are continuing to spend more than what they have contracted to spend.
The citywide meetings still aren’t back to the normal rotation, and there’s still a lot of room for growth among these demand drivers, Brand said.
The booking window for group has been extending further out, and Host’s booking pace for the rest of this year and 2024 are ahead of where it was last year and in 2019, she said.
“We’re not there in terms of roomnights, there’s still room to grow,” she said. “But in revenue, we are outpacing and so really focusing again, and it’s just the strength of the ability to push that rate to keep up with inflation.”
On the business-transient side, surveys of corporate travel managers show they’re increasing their travel budgets by 8% to 9% for the remainder of this year into next year, Brand said. There’s been a continued improvement in weekday occupancy, and those trends are tailwinds for upper-upscale and urban downtowns.
Extended Stay America operates primarily in the midscale and economy segments, which saw stabilization quickly in 2021 and 2022, said Liz Uber, chief operating officer at ESA. Compared to hotel and apartment forecasts, the company’s portfolio actually falls in line as rates and rents increase or moderate.
“As we look at full-year '23, we are seeing very similar trends as you are seeing, which is a slight decline over last year based on our considerable stabilization in ’21 and ’22,” she said.
During the pandemic, people were doing some soul searching and trying to figure out what to do and where to live, Uber said. In most cases, they stayed at hotels for long periods of times, in some cases a year.
This year, many people were finally able to afford apartments and moved or found permanent employment, so they left the hotels, she said.
Looking ahead to 2024, there’s a lot of upside, Uber said. Growth is coming from ADR, and the federal infrastructure bill passed in 2021 will continue to yield a lot of project-related business, she said.
Extended Stay America had high expectations for Florida, but demand didn’t turn out as expected this year, she said. That’s likely to turn around, driven in great part by that project business coming back. ESA expects business to pick up in Texas as well.
“We're seeing great growth in a lot of those markets where we have that project business, and that dirty boot business is really helping those hotels in that segment, so we’re definitely seeing it in pockets around the country,” she said.