Hospitality Classes: How Bifurcation Shaped 2024

Hospitality’s Slowdown During 2024

The hospitality segment was largely impacted by the high interest rate environment that occurred in 2024. Hotel performance began to decrease throughout the year as national RevPAR grew by only 1.7% year-over-year, which was driven by 1.5% rate growth. When dividing the hospitality classes, the full and select service segments noted RevPAR growth of 1.5% at the end of Q3 2024; at the same time, RevPAR for the limited service segment decreased by 2.8%.

Together with these performance metrics, sales also took a hit. Transaction volume recorded $5 billion at the end of Q3 2024. This sales activity is below the peak from 2019, and it is also around 30% lower than sales velocity from 2023. Overall, the trends noted for hotels in 2024 have led to a split in performance for each of the hospitality sectors. Hotels on the lower end noted decreases in room bookings, while higher-end hotels marked increased demand from the influx in group travel.

These dynamics underline the mixed performance within the hospitality sector, with clear distinctions between budget and premium offerings. The high interest rate environment has not only dampened operational performance, but also suppressed transactional activity.

Full Service

Despite the overall decline in hotel sales volume nationally in 2024, the full service segment stood out with strong transaction velocity and notable contributions to the sector’s performance. The return of corporate and leisure travel also boosted the segment’s standout activity. Leisure travel rebounded strongly, increasing ADR by around 20% from pre-pandemic levels, underscoring robust demand for premium hospitality experiences. Group travel also played a pivotal role, increasing by 2.1% through October 2024, positively impacting larger markets and driving ADR growth by 3.8%.

Host Hotels has been an active player in boosting sales volume for this segment. In 2024, the hospitality REIT targeted Nashville for two trades as part of a portfolio. It acquired the 1 Hotel, as well as Embassy Suites by Hilton, in April 2024, and both properties are located in Nashville’s CBD. Host Hotels’ acquisition of these locations totaled $530 million, boosting full service hotel sales in Nashville to $869 million.

Select Service

The hospitality sector saw a slowdown in construction activity in 2024, but the select service segment emerged as a bright spot, with notable increases in inventory and strategic expansions. Room inventory for this sector grew by 3.3%, outpacing the full service segment by 0.5%.

Home2 Suites by Hilton has been actively expanding within the select service space and targeted Phoenix for one of its new developments. A key project in 2024 was the transformation of a 95-year-old building located in Phoenix’s CBD into a modern hotel. The remodeled property features 148 rooms, a meeting space, and an expanded lobby designed to accommodate both leisure and business travelers. In May 2024, the newly-developed property sold for $43.3 million to Chatham Lodging Trust, underscoring investor interest in well-positioned select service properties.

Limited Service

Across the country, lower-end hotels have been impacted the most, with limited service construction activity decreasing more than other hospitality segments. This decline reduced inventory from 2,044,303 rooms during Q4 2023 to 2,034,351 rooms in Q4 2024. Demand in the segment also dropped as it decreased 3% from 2023 levels. The slowdown in activity for this sector can likely be attributed to the high inflation metrics that affected households across the U.S. in 2024.

Together with decreased demand, limited service operators felt the impacts of increased operating costs. This includes insurance, which rose by 38% for the hospitality sector. As of August 2024, the cost for hotel property insurance increased to around $680 per available room.

Hoteliers have also begun to struggle with contracted labor, as a result of hotel employees striking nationally. Many strikes erupted after Labor Day 2024 when employees walked out of the job to demand better pay and improved working conditions. In turn, strikes across the country create difficulties in hotel performance as hoteliers are unsure when the strikes will end.

Owners of limited service hotels have begun to sell their assets and reinvest in higher-tier properties, due to the recent challenges. This strategic move allows them to tap into market segments demonstrating resilience, such as full service and select service hotels that have benefited from the return of corporate and group travel. By selling their limited service hotels and reinvesting in higher-level properties, owners can protect their equity, enhance their revenue streams, and set the stage for sustained growth in the evolving sector.

Hoteliers on the Rise

Despite the slowdown in hotel performance, some hoteliers are still recording increased performance metrics. Marriott International has been an active hotelier throughout 2024. As of Q4 2024, the firm’s pipeline grew 5% from the level noted in Q2 2024 and reached 585,000 rooms.

Marriott also announced its new brands, City Express and StudioRes, which will be limited service properties. The firm is already looking to open some City Express locations in 2025. This new brand seeks to provide an affordable stay for guests, and will be made up of 100-150 rooms. On the other hand, StudioRes will be a new location for guests in search of extended stay accommodations. This property will include studios that feature queen beds and a kitchen, and Marriott plans on developing 50 StudioRes locations across the U.S. in the long term.

Hoteliers have also increasingly begun to set their sights on extended stay properties, with demand for these hotels increasing by 3% through October 2024, compared to demand for conventional hotels increasing by 0.3%. Marriott has begun to match this trend as its other extended stay brands, TownePlace Suites and Residence Inn, are growing across the country. There are 21,000 rooms underway for TownePlace Suites, and Residence Inn is finalizing 19,000 rooms. Hilton is also matching the pace in demand with its extended stay brands Home2 Suites and LivSmart Studios. Home2 Suites has around 15,000 rooms underway, and Hilton stated it plans to open around 350 LivSmart properties nationally.

Wyndham Hotels & Resorts also boasted strong performance throughout 2024, and it grew its operations system by 4%. Its global franchisee rate improved by 40 basis points year-over-year, and its domestic sales grew 10% more in Q3 2024 than Q3 2023. The firm also noted 3% net room growth in its domestic select and full service hotels. One property that aided this performance is the reconversion of the Wyndham Garden Louisville East. The 102-room select service property finished its four-year renovation process in September 2024. The reconversion is now ready to meet guests’ needs, especially with the property’s proximity to Churchill Downs—home to the Kentucky Derby.

Hotel Markets Outperforming Across the U.S.

Compared to other hospitality markets nationally, California and Florida remain successful in hotel performance as these states note consistently strong visitor numbers. Throughout 2024, these states marked increased transaction volume, with 176 trades in California and 164 sales in Florida.

Florida

As of Q4 2024, 50% of new hotel developments are in the Pacific, Mountain, and South Atlantic regions. In the South Atlantic, hotel developments remain stable in Florida—especially Fort Lauderdale. There are currently three hotels scheduled to deliver in the metro during 2025: the Omni Fort Lauderdale Hotel, Home2 Suites by Hilton Weston Fort, and the Whitfield Las Olas Hotel & Spa. The completion of all three properties will strengthen the metro’s full and select service segments.

Additionally, Related Group & Partners announced plans for a $2 billion mixed-use hotel development in the metro. The project will take up 40 acres at the Bahia Mar marina upon its scheduled opening in 2029, and will be under hotelier Marriott and branded as a St. Regis made up of 200 rooms.

California

On the West Coast, markets in California recorded consistent positive performance metrics throughout 2024. Particularly, Los Angeles and San Diego outperformed other markets in the state, with 2024 occupancy at 71.6% and 73.9%, respectively.

While developments declined nationally, construction is on the rise in Los Angeles and San Diego. There are about 2,000 rooms underway across 17 properties in Los Angeles, which will increase the market’s inventory by 1.9% upon completion. Standout submarkets for construction here are the Tri-Cities and East Los Angeles.

San Diego will see its inventory increase by 4.4% with 12 hotels scheduled to open throughout 2026. The long-awaited Gaylord Pacific Resort Hotel and Convention Center is expected to complete in May 2025 and will be made up of 1,600 rooms. If it opens on schedule in 2025, it will bring the greatest addition of rooms in a year throughout the past 20 years.

Midwest

The Midwest also records positive activity. Cleveland has made a strong recovery from its pandemic levels, and marked the highest RevPAR increase in the region with a 9.3% uptick. Indianapolis is also on the rise with a notable RevPAR boost of 7.3%. Together with the jumps in RevPAR activity, hotel construction is ongoing in the region. Detroit and Indianapolis, combined, make up the most active delivery pipelines as more than 2,100 rooms are coming to market.

Hospitality to Improve in 2025 and Onward

As interest rates decline, the hotel industry will likely see an increase in new supply moving forward. The Fed also expects inflation to return to the 2% target by mid-2025, which will further improve hotel activity. Despite sales declining in 2024, hotel owners have stated they expect transactions to improve during the first half of 2025, due to dry powder remaining on the market.

High inflation rates throughout the past few years have caused buyers to stay on the sidelines, but private and institutional investors are expected to come back with inflation cooling down. With inflation and interest rates softening, loans will be more accessible for investors to secure.