Strong Hotel Performance Amid Economic Headwinds

The hospitality industry is off to a promising start entering H2 2023, with typical seasonal trends developing and revenue per available room (RevPAR) continuing to grow. The sector saw an increase in buyers in 2022, and experts predict continued demand for the remainder of 2023, specifically for high-end properties that are seen as recession resistant. Read on to understand the current state of the hotel industry and explore the outlook for the remainder of the year.

Continued Momentum From 2022

The U.S. hotel industry has continued to experience growth in 2023, building upon the momentum gained in 2022. According to data provided by Smith Travel Research (STR), the sector experienced pronounced performance in April 2023 compared to earlier months. April achieved record-high room rates, occupancy, and RevPAR across the hotel industry, the highest levels since July 2022. The average daily rate (ADR) level in April was also the highest ever recorded on a nominal basis. Even after adjusting for inflation, April’s ADR level was 0.7 percent higher than the corresponding period in 2019, according to Hotel Management.

Travel motivated by leisure remains the primary factor driving the recovery of the travel industry; however, there has been a noticeable increase in weekday demand in recent weeks. The demand for business-related travel has also contributed to the success of the top 25 markets.

According to STR, Chicago experienced the most significant year-over-year growth among the top 25 markets in all major performance indicators, including occupancy (increased by 23.9 percent to reach 72.2 percent), ADR (rose by 29.6 percent to $174.71), and RevPAR (increased by 60.6 percent to $126.13).

It is worth mentioning that only two markets, namely New York City and Las Vegas, reported an occupancy rate above 80 percent in April, with rates of 82.1 percent and 80.8 percent, respectively.

Hospitality Performance

Room rates increased by over 10 percent in Q1 2023, with RevPAR slightly higher than expected. However, adjusted for inflation, room rate, and RevPAR are still below 2019 levels, and it is unlikely that 2019 results, in real terms, will be achieved until 2026.

A mild recession is expected, with impacts varying across different hotel classes. Labor availability and cost are significant concerns, and wage growth may negatively impact the industry’s bottom line.

Rising inflation and actions taken by the federal reserve to address it could negatively affect hotel performance later in the year. Despite this, industry experts predict that demand and REVPAR will still increase throughout 2023 and in the future.

Hotel Assets in High Demand

During the onset of the COVID-19 pandemic, the trade rate for hospitality assets was at its lowest in three years, at 38 percent, according to Ten-X. However, as the pandemic subsided, demand for hospitality assets increased, reaching its peak in Q2 2021, only to cool off later and drop back to 51 percent in Q1 2022, as investors anticipated rate increases by the Federal Reserve. During this period, investors sought safer investments, and hotels became a more attractive long-term investment option. In Q2 2023, the trade rate for hospitality assets is on the rise again.

Hotels have emerged as the hottest asset class of 2023, with trade rates reaching 82 percent, as revealed by Ten-X auctions.

Industry Insight

CW Capital & Damian Smoter

CW Capital has sold 36 (26 trades in 2022 and 10 in 2023) hotels from Jan 2022 to May 2023, according to Damian Smoter.

• The hotel market has cooled from 2022 highs. This is not entirely an asset class-related slowdown and is less of a decrease in key auction stats (bidders and % of reserve) than in other asset classes. Rather, this is mostly capital market-related. The cost of capital is impacting financing for larger transactions.
• Hotel KPIs are strong – Rates, RevPar, and Occupancy have reached 2019 levels in a lot of markets.
• Demand is still strong, and the number of bidders is fairly constant, but those bidders are being more disciplined, as shown in the reduced percentage above for reserves achieved.

Crexi Intelligence & Evan Ptalis

• Crexi’s marketplace has become a primary disposition tool for sellers strategically driving price discovery with certainty of execution more now than ever, given today’s market conditions.
• Albeit slower hotel transactional volumes in the broader market year-over-year, Crexi continues to increase YTD sales volumes primarily by providing key disposition risk mitigants against pricing retrades and a volatile debt market.
• With many hotel assets witnessing a plateauing of cashflows while facing many macroeconomic headwinds ahead, sellers value the efficient access that Crexi provides to a fresh, diverse, and trusted flow of private capital across Crexi’s buyer reach.

Takeaways

Overall, the hotel industry is expected to have a good year in 2023. Although there may be some slight effects on hotel performance later this year due to economic challenges and measures taken by the Federal Reserve to address them, industry experts anticipate that demand and RevPAR will continue to increase throughout 2023 and in the years to come.