The outlook is strong, although some headwinds remain
Two years into the global pandemic, the outlook for the US hospitality industry is decidedly positive. STR, a CoStar Group company and a global leader in hotel analytics, continues to report steadily improving metrics in the United States. The outlook for the sector is embodied in the following six themes.
1. Leisure demand has been strong, with little price resistance. When international travel ceased in early 2020, travelers stayed closer to home in what has been dubbed the Great American Road Trip. Equally interesting was the immense purchasing power that leisure travelers brought. While the onset of the pandemic was characterized by spending, there was a rapid shift towards buying experiences, and high-end vacations topped the list.
2. Groups return sooner than expected. Another positive signal for the hotel industry is the continued increase in demand from groups. Consumption of group rooms, sold in increments of 10 or more, reached 7.2 million in April 2022, just 1 million rooms below the April 2019 level and a clear indicator of recovery in business spending on trips. After two years of virtual absence of travel, it is likely that the return to associative and collective events will serve two purposes: certainly, there are deals to be concluded and customers to see, but perhaps just as important, the social interactions that have been missing Zoom or Teams meetings can be revived.
3. Lack of clarity on a return to the office is hampering transitional demand from businesses. Over the past two years, workers have been extremely productive — without going to the office — and now business leaders are rethinking what office work and back-to-office patterns look like. Hybrid work schedules with two or three days in the office seem to be the new norm. But if fewer workers are in the office, that means fewer workers can be visited by other business travelers. This, in turn, leads to fewer business trips. So back-to-office plans have a direct impact on individual demand – and while those plans are evolving, so are the outlook for temporary travel.
4. The hotel development pipeline is slowing down. The number of rooms under construction continues to decline, down to 150,000 in April, from more than 210,000 rooms at the start of 2020. Projects that have been launched will continue to open, but projects in the final planning stages could be delayed. There are myriad reasons for delays: interest rates have risen and may require the developer to go back to the drawing board to reorganize the capital stack, and it may be difficult to find construction crews in a creeping single-family and multi-family development. In addition, the supply chain for items such as doors, refrigerators and televisions is still disrupted, delaying the start of work.
5. Transactional activity intensifies. Hotel real estate is considered a hedge against inflation because room leases can be reset overnight. In an environment of high inflation, interest in hotel assets is high. 2021 marked the strongest year on record for deals, with over $50 billion worth of hotel properties sold. Many of these trades were at the higher end of the markets, whether hotel-casinos or leisure centres, and the deals often reached record prices per room. Continued robust investment activity can be expected for the foreseeable future.
6. Lack of workers and higher labor costs keep operators up at night. The main challenge that makes operators nervous is the lack of access to personnel. According to the U.S. Bureau of Labor Statistics, the industry is operating with about 300,000 fewer workers than at the start of 2020, and wages for line-level employees are growing at a double-digit pace. In addition, existing staff members are often asked to work longer hours, leading to an increasing number of employees leaving their jobs. There is no single, simple solution to address the labor shortage, but two outcomes are clear: services will have to be reduced or adjusted, and wages will rise, putting pressure on company profits. owners.
After the worst downturn in history, headwinds remain and will keep owners, investors and operators on their toes. But for now, impressive operating results continue to attract capital to the US hospitality industry.
JAN FREITAG is National Director of Hotel Analytics for the US CoStar Group and a member of the ULI Hotel Development Product Council.