What to Expect in the Hospitality Industry in 2023

By Mark D. Podgainy

Last year was a year of dramatic recovery for the hospitality industry.  What’s ahead for 2023?  Definitely clouds, but the question is whether the clouds will pass over or they will result in a storm.

What’s Ahead

• High labor costs will persist. While many workers have come back to the hospitality industry after leaving during the Covid-19 pandemic, the industry is still short of employees.  This supply-demand imbalance will continue to keep labor costs high and impact margins.  As the economy slows the supply of employees will grow (layoff announcements in the news have been increasing), but it is unknown whether the industry will be able to attract a high enough share to fill the holes that exist today.
• Inflation will hang around, but at lower levels. Inflation declined noticeably in the fourth quarter of 2022 and is expected to continue to decline, slowly, throughout 2023.  However, the extent of the decline depends on a number of diverse factors such as harvests, consumer spending, energy prices, interest rates and China’s reopening, among many others.
• Interest rates will continue to rise, but probably not for long. The Federal Reserve appears determined to stamp out inflation and has stated that it will push rates higher in 2023.  It seems likely that there will be a pause in the rate hikes sometime in 2023 as policy makers review the economic data, but the timing and length of the pause is currently unclear
• Supply chain disruptions will ease but may not go away entirely. Goods have been increasingly available over the last few months and that trend is expected to continue, particularly as China reopens.  However, adapting supply chains takes time – this story is not yet over.
• Availability of service providers will supplant availability of goods as an issue. As supply shortages ease, difficulty in scheduling service providers is rising due to heightened demand.  Many properties put off repairs during the Covid-19 pandemic, but operators now need their facilities in full working order since occupancy levels are much higher.  The service businesses that support hotel operations are in peak demand and short staffed too so they are charging a premium, enabling inflation to persist.
• Weakening consumer demand will pressure both ADR and occupancy. While 2022 U.S. RevPAR exceeded 2019 levels by 8.1%, it was driven by higher ADR (up 13.6% to 2019), rather than occupancy (down 4.9% to 2019).[1]  The expected economic slowdown that is frequently discussed will likely reduce consumer demand for travel (extent unknown), which has been the major driver of the recovery, and may also result in a more price discriminating consumer, impacting both sides of RevPAR.
• Business travel will continue on a slow recovery path. The work from home trend, along with videoconferencing technology, will keep business travel muted for the foreseeable future, impacting hotel occupancy, meetings and banquets.  The risk in 2023 is that a recession stalls or reverses the recovery.
• Franchisors will put pressure on franchisees to comply with their agreements. Owners and operators got a break during the Covid-19 pandemic – they were able to postpone PIPs, use their FF&E reserves for operating purposes, and mothball food and beverage outlets.  But given the robust industry operating environment, the brands are determined to enforce standards to ensure consistency across their systems.  Leniency will be much harder to come by.

Key Implications

• Pressure on the P&L, both on the top line and on expenses. A looming consumer slowdown, persistent inflation and high labor and service provider costs will challenge P&Ls in 2023.  Owners and operators will need to be disciplined.
• Borrowing costs will be more expensive and financing/refinancing will be more difficult. Owners facing debt maturities this year may need to put in more equity to afford the higher interest payments they will be facing through a refinancing and/or explore creative financing solutions.  Further, owners that were seeking to borrow funds to start required PIPs that were paused will experience significantly higher borrowing costs that may require a reexamination of the PIP to reduce the overall cost.  Lenders are either becoming cautious and more selective or taking a pause on new loans until they have better visibility into the economy, so the “usual” financing sources may not be available.
• Difficult situations will be difficult to get out of. Over most of the last 10-15 years owners and operators facing stress or distress have been able to refinance or sell their properties, and during the Covid-19 pandemic “kick the can down the road” until better times.  However, most properties refinancing at this juncture are likely facing much higher borrowing costs, and cap rates have jumped as well.  Additionally, lenders are now much less likely to kick the can, and the government is most likely not going to provide relief funds or prevent foreclosures.

Important Actions Steps

• Focus on Labor – Operators will need to entice employees by providing a welcoming and safe working environment, a career path, managerial support and competitive pay. Labor needs can be mitigated by utilizing technology.  Further, cross-training employees across multiple roles can lead to better flexibility and allows hotels to run leaner — which is especially important when it’s not always possible to fill every open job.
• Look at every cost item – Every cost line should be reviewed and challenged. Though there may be little fat to cut given the significant cost cutting that has occurred over the last few years, containing costs is just as important.
• Close the books timely, and review immediately. It is critical to have timely information so that actions can be taken quickly to address top line or cost issues.
• Prepare, monitor and update monthly and 13-week cash flows to monitor liquidity – The 13-week cash flow forecast has been a very useful tool in managing liquidity over the last few years and should continue to be used. Reviewing the variance to forecast on a weekly basis can help improve forecasting over time.
• Hire professionals to assist with financing, sales, and distressed situations – Given the challenging environment for transactions and difficult situations, owners should seek out professionals (brokers, investment bankers, consultants, legal counsel) for assistance. Going it alone is not a recipe for success.
• Keep communication lines open with contract counterparties – Proactively communicating with franchisors, management companies, vendors and lenders is a good business practice, and especially beneficial in a challenging environment as they are more likely to be flexible and help you achieve your goals.

[1] Source: STR