As the U.S. hotel industry nears its second-quarter earnings call season, hotel experts and analysts expect the publicly traded hotel brand companies and real estate investment trusts will focus on the two biggest issues facing the industry: labor and the return of business travel.

Investors are focused on a lot of things, like headline risks and the Delta variant, but those are still near-term risks, said Michael Bellisario, senior hotel research analyst and director at Baird. Those issues don’t really change the recovery trajectory looking into 2022, 2023 and 2024.

The short-term risks may cause a slower recovery, particularly for business travel’s return, but overall the recovery trajectory is generally still the same, he said.

The general expectation is that business travel will return after Labor Day, said C. Patrick Scholes, managing director of lodging and experiential leisure equity research for Truist Securities Group. While business travel will be better after the holiday, the degree to which it improves is still an unknown.

“The hotel industry has been a little bit spoiled by the strength of leisure, and maybe people expect that the fall will be the same story of recovery in business travel that leisure saw in spring and summer.”

There are limits to leisure’s recovery, as well. Leisure travel is improving, but it’s not fully recovered anywhere near the degree the industry has seen before, he said. Similar to last year, leisure travel will likely slow after Labor Day.

Executives will share some figures on forward-looking bookings, but it’s difficult to have any hard statistics since the booking window is still incredibly short, he said.

The way Baird analysts have looked at travel demand in recent months is the recovery will be nonlinear and a stair-step function, Bellisario said. There won’t be a perfect handoff of U.S. leisure travel in Florida, Texas and Southern California in the spring to leisure travel in Chicago, Boston or central business districts in the summer and then to business travel in some major markets in the fall.

There will be months where demand ticks down sequentially and revenue per available room is flat or down, he said. Maybe business travel ramps up slower or leisure extends a little further. There’s no clear line in business recovery, and maybe it slowly gets pushed to next spring.

“The path is higher,” Bellisario said. “It might just be a little flatter for the next six months than maybe some more optimistic people found three months ago.”

The labor shortage in the U.S. hotel industry is a self-inflicted problem, Scholes said. Companies were quick to lay people off when the pandemic began and have been “very stingy” about wage increases.

“I wouldn’t say it’s a labor issue,” he said. “I would say it’s a wage issue.”

Many management teams earlier this year expected the end of enhanced unemployment benefits in several states would resolve the issue, but that doesn’t seem to be the case, Scholes said.

“They have some tough questions about what they want to do with labor and the amount of services they want for guests,” he said. “They hope to raise rates back to pre-pandemic levels. Sooner or later, you’re going to have to raise service levels back as well.”

It's an ongoing question whether hotels can find people to work the front desk or clean rooms, said Jan Freitag, national director of hospitality analytics at CoStar and senior vice president of lodging insights at STR. Finding general managers is also a challenge because so many have felt burnt out taking on the roles of other employees furloughed or laid off last year.

“It's going to be interesting to see how the brands are talking about access to labor and how the brands are talking about wage increases,” Freitag said. “What are they seeing? What are they expecting? How does that fall to the bottom line when they talk to management companies or even the properties that they manage themselves?”

For brands, it’s going to be about the sequential improvement, management optimism and encouraging trends, Bellisario said. Despite the current challenges, for the most part, it’s a 2022 story for these companies. Unit growth continues to be solid, and new construction is starting to pick up a little in the U.S.

“That was the big driver for these companies pre-pandemic,” he said. “I think it will continue to be the driver for these companies, especially as they take even more share now given the more challenging lending and development environment.

The brand executives will likely say that after a brief slowdown, owners are once again interested in signing agreements, Freitag said. While that doesn’t mean those deals will immediately break ground, it’s a sign these companies didn’t stop selling franchise agreements.

After the last recession, more branded properties converted to independent hotels than the other way around, he said. Most of that occurred in the lower chain-scale segments, so many were properties that were deflagged. However, it will be interesting to see if that happens again and if in that churn there are some higher-end properties involved, he said.

Companies that have a more domestic focus, particularly the REITs, are more likely to beat expectations, Scholes said. He added he has a more conservative view than other analysts on companies like Hyatt Hotels Corp., Hilton and Marriott International because of their exposure in international markets.

“Domestically, things were marginally better than we would have expected back in April, but I cannot say the same for international,” he said.

Canada seems to be opening up for U.S. travelers, but the U.S. still isn’t opening up to Canadians, Scholes said. For America, Europe still seems to be under tight lockdowns, and it’s unknown when countries will reopen.

Management teams will still be cautiously optimistic, but perhaps more cautious now than they were back in April because of the Delta variant, he said.

Investors are focusing on the hotel deals the REITs have been making, Bellisario said. They want to know the growth expectations for the acquisitions and how that compares to the cost of capital to complete these deals. They’re looking at hotels acquired at peak pricing and wondering how many years it will take for the properties to ramp up to the projected numbers.

It’s not so much the price but the price per key as well as the markets where REITs are buying, he said.

“Everyone is selling the losers and buying the winners,” he said. “How sustainable is that?”

Investors are also taking a look at how the REITs are reinvesting in their portfolio, Scholes said. Renovations have met with mixed responses because while they do help with RevPAR growth, renovations also take away from free cash flow, and investors will eventually want to have dividends come back.