Hotel Demand Remains Strong, Despite Inflation

The hospitality sector was among the hardest-hit during the COVID-19 pandemic and in the immediate aftermath. But things began to turn around for hotels, motels and other hospitality properties in 2022. Experts from Matthews Real Estate told Connect CRE that the sector is almost fully recovered, but operating costs remain a challenge.

First, the good news for hotel owners and operators, namely strong average daily rates (ADR) at $150 and Revenue Per Available Room (RevPAR) coming in at $100.

“Nationally, hotel RevPAR has seen an impressive recovery,” commented Ryan Kawai Sanchez, Matthews associate. “September figures boasted a 13% increase over the same period in 2019.” He went on to say that revenues have almost fully recovered from pre-COVID levels and are anticipated to continue rising. “GPD growth and RevPAR growth are closely aligned,” Sanchez added.

Mitchell Glasson, Matthews associate vice president, hospitality, said that chain hotels are outpacing independent operators in RevPAR growth. Additionally, chain hotels, and hotels in urban areas, are experiencing post-pandemic highs.

Now for the bad news. Part of the reason for the ADR increase is inflation. This, in turn, is leading to higher operating costs. “Operation costs are higher, and hoteliers are struggling to match 2019, due to inflation,” Sanchez said. “Occupancy is still lagging compared to 2019 figures.”

Furthermore, the primary expenditure is cost of labor. According to Glasson, hospitality labor costs are increasing at a faster pace than those of retail. As a result, “hotel staff is choosing to work at the higher-end or name brands, rather than small one-off independent brands,” he said.

He went on to say that even with higher wages offered by some of these hotels, employment levels have yet to surpass pre-pandemic figures. All of this “has translated to operators charging higher rates throughout the space, as pricing is slightly inelastic, especially in markets with increasing demand from revenge travel,” Glasson observed.

Still, inflationary pressures haven’t dampened consumer travel. “People are itching to travel and willing to pay higher prices than they were before the pandemic,” Glasson explained. “There may be a shift as prices rise, but experts don’t predict a massive drop-off.”

Sanchez and Glasson both anticipate that inflation will weaken by 2024 or 2025, meaning profits will likely meet prior levels. But until that happens, what should hospitality investors look for? The best properties are the ones with a strong cash flow, according to Matthews’ Associate Kate Dockery. “These are the properties that have seen consistent growth through 2019 and rebounded by 2022. These are the hotels that will also experience continued cash flow increases in the years to come.”

Also important are national hotel brands “that have the benefit of online bookings and are typically easier to implement management into,” she said. “These types of hotels are also the first to benefit from group and transient business travel.”