Hotel industry executives, team members and analysts recently met over two days at the NYU International Hospitality Industry Investment Conference. Here are seven takeaways from the conference.
1. Operating Fundamentals Are at the Highest Levels Since the Start of the Pandemic
Preliminary U.S. hotel industry revenue per available room for year-to-date April was $82.36, up 0.8% over the same period in 2019. Room demand was down 4% compared to 2019, with RevPAR gains driven solely by average daily rate.
Nominal ADR was $140.75, an 8.8% increase over 2019. Real ADR growth over 2019 — adjusted for inflation — was positive for the first time since the beginning of 2021.
Post 9/11, Real ADR took six years to recover; post the 2008 Great Recession, real ADR took eight years to recover; and in the COVID-19 pandemic, real ADR took 24 months to recover, underscoring the strong pace of the current recovery.
2. The Forecast Is Strong
Business on the books for the next few months is very strong, and this summer is forecast to be the best summer on record from a demand perspective. Group demand is strengthening, with 7.2 million luxury and upper-upscale group room nights sold in April, the highest month for group demand since October 2019, which had 8.6 million group nights sold.
While the economy is expected to slow as the Federal Reserve takes steps to combat inflation, the possibility of a recession is less worrisome to the lodging industry than prior recessions due to the buildup of consumer savings during the pandemic and pent-up demand in key segments such as group, business travel and international inbound travel.
3. Misalignment Between Operating Fundamentals and Debt Markets
Liquidity in the debt markets has tightened over the past 60 days and both base rates and spreads have widened substantially. The debt markets do not appear to be giving credit to the industry for the strong and accelerating operating fundamentals, likely due to potential macroeconomic headwinds.
4. Priorities on Sustainability, Diversity
Environmental, Social and Governance and Diversity, Equity and Inclusion initiatives are evolving into key priorities for brands, operators and investors. Expect to see more initiatives on both the ESG and DEI front.
Industry stakeholders should work on ways to collaborate versus compete on ESG. Brand and operating standards, and new-build prototypes will have to get more sustainable.
While some lenders are requiring ESG standards in new loan agreements, a commitment to ESG will improve access to new sources of capital.
5. Labor Challenges Will Persist
According to the American Hotel & Lodging Association, 33% of hospitality workers that left their jobs during the pandemic will not return to the industry. Flexibility and compensation are the key drivers of the lower labor-force participation rate. Wage rates for line-level positions have gone up significantly through the pandemic; however, they are still below other key industries that employ shift workers.
Operating practices such as daily pay, split-shifts and adjustable start-end times will become increasingly prevalent, as brands and operators continue their focus on doing more with less. Technology initiatives will be a key driver of efficiencies, since labor challenges will persist for the next few years.
6. Transaction Market in Temporary Slowdown
While transaction activity was off to a strong start in the first quarter, it has decelerated in the past month. Recent volatility in the equity markets, increasing Fed funds rate, lower liquidity in the debt markets and continued bid-ask spreads have slowed down the pace of transactions; and there are fewer listings being brought to market.
This is expected to change past the summer, by which time a little more clarity on geopolitical and macroeconomic fundamentals is anticipated. Asset values for resorts and economy class hotels are expected to continue growing, while values for urban hotels will face headwinds for the next two to three years.
7. Mid- to Long-Term Industry Outlook Very Positive
Paradigm shifts in demographics and consumer behavior bode well for the long-term health of the lodging industry. Remote and hybrid work, rising wages across a growing middle class, a significant segment of the population retiring early and traveling more, growing international inbound travel, and consumers’ preference to buy services and experiences versus things and products are all powerful demographic shifts that will have a highly positive impact on the travel industry for the next several decades.
The lodging industry is remarkably resilient, as evidenced by strong recoveries post-9/11 and after the Great Recession, and the industry’s recovery since the outbreak of the COVID-19 pandemic is shaping up to be even stronger than the recovery from the past two major downturns.
Daryl Cronk is director of hospitality market analytics, South, at CoStar Group.
Romy Bhojwani is director of hospitality market analytics, Northeast and Midwest, at CoStar Group.
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