By Joseph Pierce, MAI
The hotel industry has moved on from many challenges that have plagued it since the COVID-19 pandemic, but new challenges and opportunities have presented themselves in 2023. Carrying on from 2022, markets continue to deal with the highest cost of debt in decades, but the fear of a recession has receded, and the possibility of a “soft landing” from 40-year high inflation growth may be a reality. The industry remains flexible to the needs and desires of guests and continues to pivot to meet the challenges of the future.
H&LA’s consultants have worked on many assignments in 2023, bringing with them the opportunity to see firsthand how some of these new concerns and trends are affecting all segments of the industry. While the hope is that some negative trends will not last, we anticipate a number of travel trends that will continue to evolve. How the hospitality industry responds will impact the growth of the industry in the coming years.
1. The Traveler. The desire on the part of consumers to spend on travel and experiences following the pandemic has proved resilient. The job market has remained strong, and consumer spending has not decreased since the pandemic. Visa Global Travel Intentions study noted that while 73% of Americans surveyed noticed increased costs of travel, only 6% of travelers say it will delay or impact their travel plans. Travelers are focusing on trips for relaxation, exploring new things, and seeking adventure. As leisure travel persists and group travel gains momentum, there is an expectation that business travel will rebound in the upcoming year as the third quarter of 2023 was positive for business travel. However, corporate budget limitations relative to price increases, recession concerns, and geo-political events have all weighed on corporate travel. Additionally, travel disruptions have an impact on employee willingness to travel for business. According to TripAdvisor, a higher cost of living due to inflation is causing travelers to alter travel plans by taking shorter trips closer to home. Those who plan to travel next year anticipate spending more than usual. Travelers will continue to seek value where they can when they travel. The use of loyalty programs and points to pay for vacations is identified as a cost-saving measure. A potential negative impact on leisure travel is the return of student loan repayments in October 2023, causing some travelers to re-evaluate their plans. International visitors are returning, but at a slower pace than U.S. travelers are going abroad. China, a strong travel partner, has only recently relaxed travel restrictions and should aid in correcting the imbalance in 2024. Top visitation volume is currently coming from Latin America, followed by the Asia Pacific region.
2. Investors. Investors in the hospitality space have enjoyed the benefits as a class of assets that showed meaningful price gains over the past year while other asset classes, such as office space, have been impacted by a significant decline in value. According to Colliers, while price gains slowed in the third quarter, sales activity picked up. The ability of hotels to stay ahead of inflation, driven by the ability to reset room rates and pricing for services daily, has afforded hotels the ability to trade at wider cap rates than other asset classes. The opportunity to reposition assets through renovations that were delayed during the pandemic is an attractive value add in destination cities. Also, as asset classes such as offices become unattractive, capital will go elsewhere. In the current environment, hospitality deals are easier to underwrite due to the maturity and transparency of the sector versus new sectors such as data centers.
3. The Downside. Pacific Investment Management Co. fund joint venture is giving back a portfolio of 20 hotels throughout the U.S. to lenders, which translates to over a $240 million mortgage. Park Hotels & Resorts walked away from two properties in San Francisco with a total debt of $725 million as the properties were placed in receivership. Also, Ashford Hospitality Trust handed back five properties and is expected to return 14 more to receivership. In each case, the bottom-line goal was to shore up the company balance sheet as many of the properties were financed with low debt and would require refinancing at current rates. While it is hopeful that stepping back from mortgage properties that were financed by inexpensive capital is coming to an end, it is more likely others will need to follow suit as properties need to be refinanced or renovated.
4. Extended-Stay Properties. This segment of properties excelled during the pandemic. As a cheaper overnight accommodation for guests and being inexpensive to build and operate, it has become a popular segment within the industry. Recently both Hilton and Marriott announced plans to expand their offerings into this lower price point segment. According to STR, extended-stay hotels registered occupancy above 74%, outpacing all other segments. The S. Travel Recovery and Growth Insights Dashboard cites strong infrastructure spending resulting in increased demand for long-term hotels. Geoff Ballotti, CEO of Wyndham, stated “There are 1.8 million companies contracting accommodations for infrastructure workers.” While other segments of the industry are still recovering from the pandemic, this segment stood tall in the dark time and appears to have a strong future.
5. Hotel Technology. Cloud versions of PMS systems gained momentum in 2023. Hotel brands like Wyndham, Minor, Best Western, Melia International, Scandic, and Outrigger are adopting Oracle Hospitality’s cloud-based Opera PMS. Mews PMS cloud-based system boasts 5,000 properties. Marriott International is installing an Agilysys cloud PMS system throughout its North American properties. The ability to personalize a stay has been a challenge for legacy booking engines. Historically, OTAs have outperformed hotel platforms in booking restaurant or spa reservations as well as hotel rooms. Travel apps can be used to personalize a trip, provide support, and anticipate inconveniences. IHG recently announced that guests can book guestroom attributes such as a higher floor or a room with a view and personalize their stay. According to IHG, this booking customization results in $22 to $41 additional revenue per night. The challenge for hotel owners and operators is the need for the system to keep it simple. With reduced staffing, properties cannot afford extensive training periods. Additionally, the ability to utilize an all-in-one system that is intuitive to interact with is imperative. A casualty of the COVID-19 pandemic was the elimination in many hotels of in-house IT employees, which changes the dynamic when interacting with technology vendors. Unfortunately, a 2023 JD Powers study shows the overall satisfaction with hotel technology continues to trail that of other industries.
6. AI Influence. AI is working its way into the hospitality industry. One method is the use of AI in vacation planning. Travelers may use AI to help plan or research a destination. AI can introduce historical buildings, museums, and attractions. The objective is to create a digital travel companion and provide assistance at every step of the journey. The planning influence of AI includes booking accommodations, activities, and food recommendations. Over 75% of those who used it say they are likely to do so again in the future. As such, the hospitality industry must ensure information is available for AI to find and share with travelers doing the research. Many independent travel sites have incorporated some form of AI chatbot to answer questions for travelers.
7. Sustainability. There is a growing trend where travelers take their time to connect with local culture, disconnect from technology, and adjust travel plans to incorporate sustainability. Surveys suggest sustainability will be a consideration for travelers more than ever before. The Visa survey mentioned earlier revealed that 76% of respondents will choose eco-travel options if they are available, specifically when it comes to accommodations. Studies show that travelers are willing to pay over 20% more for environmentally friendly accommodation. Additionally, travelers say accommodations have a responsibility to support the local communities in sustainability efforts and such actions will impact their decisions. Being environmentally responsible is moving from being nice-to-have to a must-have for many travelers. One example of a property embracing this trend is The Villa Copenhagen Hotel, which provides several green features that it actively promotes such as a rooftop beehive, and an organic vegetable and herb garden. Much of the material in the rooms is made of recycled or sustainable materials, while the pool is warmed by excess heat generated from the kitchen.
8. Climate Impacts. Changing climate conditions are anticipated to impact travel plans. Extreme heat or dangerous conditions such as hurricanes have begun to shift demand patterns. While guests may not completely avoid a specific location, it is likely that unfavorable climate conditions may influence when or where they choose to travel. However, these conditions present opportunities. H&LA has studied the development of indoor family attractions in markets of extreme heat and the benefits they derive. The design of the structure can be very influential in the operation of the facility and mitigate weather-related impacts. Lake Nona Wave Hotel in Orlando, Florida, utilizes smart windows that extract ultraviolet rays coming in and will adjust the room climate accordingly. We have worked with properties whose window design can withstand Category 5 hurricane winds and provide heat reduction along the Florida coast. Plans associated with water retention and reuse are becoming more commonplace. These climate opportunities have escalated operating and development costs. Additionally, insurance rates continue to rise in states like California and Florida as the possibility of wildfires and hurricanes are a continuing threat.
9. Wellness Industry. Global Wellness Institute estimates that wellness tourism will top $1.2 billion by 2025. Generally seen within the purview of luxury hospitality, the general public demand for a version of a wellness resort has grown rapidly. Luxury hotel brands are developing mixed-use developments combining resort, residences, and wellness clubs in urban areas. Meeting planners are opting for locations with leisure appeal and the mixed-use wellness property fits their client’s needs. Many properties are replacing the decline in corporate demand and introducing team building through wellness as a strategy to drive team cohesion. The wellness concept is evolving into more than spas. Demand has grown to include activities such as kickboxing, mindful yoga and meditation, creative fitness classes, and nutritious dining. A survey by com noted that 72% of guests would be willing to pay 10% more for a wellness experience, while 10% stated a willingness to pay 50% more. VICI Properties, an experiential real estate investment trust with notable connections within the gaming industry, recently invested $150 million into Canyon Ranch as it intends to open resorts and social clubs in urban markets. Canyon Ranch was the first urban hotel to open in Texas featuring fitness and spa facilities.
10. Financing. The Federal Reserve has raised its benchmark rate 11 times from a Federal Funds Rate range of 0.25% to 0.50% in March 2022 to 5.25% to 5.50% in July 2023. This new normal interest rate level will likely remain in place through much of 2024, possibly moving up or down based on the Federal Reserve’s interpretation of its impact on the inflation cycle currently affecting the economy. While the hospitality industry remains able to access debt, cheap capital interest rates are no longer in ample supply. GlobalData’s Financial Deals Database shows that transactions in the hotel industry are down 42.9% in North America and potentially more depending on the brand and market. With increasing costs of money and tightening banking standards, investors and developers have needed to seek sources of financing beyond traditional banking contacts. Kalahari Resorts and Conventions recently secured a $212 million mezzanine loan to fund the development of an indoor waterpark resort in Thornburg, Virginia, from VICI Properties Inc. Trinity Investments used the commercial mortgage-backed securities arena for a $515 million refinancing of the Westin Maui Resort & Spa. Communities are stepping forward to aid in financing hotel projects. The Savannah-Georgia Convention Center Authority has pledged to issue bonds to support the construction of a hotel to complement the expansion of the convention center following the hotel developer’s withdrawal from the project citing financing issues. The Indianapolis City-County Council will offer a bond issue to build the 800-room Signia by Hilton Indianapolis, and the Georgia World Congress Center Authority is assisting in the construction of the 1,000-room Signia by Hilton Atlanta.
11. Operating Profits. Hotel profitability is struggling to make progress relative to last year. Leisure travel has tapered off and commercial travel continues to drag relative to 2019. While operating margins were maintained during the pandemic, generally due to the reduction in services and payroll, as demand has picked up so have the corresponding operating expenses. As operating performance metrics have come back down to earth, and while many of the service changes have remained in place (such as the elimination of daily housekeeping in many hotels), CoStar indicates that the average cost per available room is $6 higher than in 2019, with over 50% of that expense in labor increases. However, CoStar also notes that with the operational changes, the growth of inflation slowing, and labor being utilized at levels necessary to run the business, hoteliers have resisted increasing wages. Also of note, the fall conference season picked up in 2023, a welcome trend to convention cities that have struggled to bring back convention activity. While overall occupancy fell in 2023 after the first quarter, ADR has continued to grow, which suggests there remains pricing pressure while the growth has softened.
Conclusion: In 2023, the hospitality industry has nearly evolved past the negative influences of the COVID-19 pandemic. The guest continues to look for new dynamic alternatives and a better work-life mix in the future. Many of these trends and issues will continue into 2024, making it another year of challenges for the industry. However, the industry’s willingness to incorporate new technology into its operations, along with the ability to be dynamic and pivot toward those new challenges and trends, will serve the hospitality sector well heading into the new year.
