Hospitality Outlook

Outlook Summary

The U.S. hospitality sector's uneven recovery since the pandemic has seen business travel rebound, narrowing the performance gap with leisure hotels.⁵ However, despite this positive trend, the sector's overall performance remains below pre-pandemic levels, with forecasts for 2024 adjusting expectations downwards.⁶ Growth varies, with some regions experiencing revenue growth while others contract, influenced by economic factors such as inflation and savings rates.⁵ Additionally, a notable decrease in hospitality transaction volume highlights the sector's ongoing challenges.¹⁰

Market Fundamentals

Smith Travel Research, or “STR,” a leading source for hospitality data, shows that the U.S. hospitality sector recovered unevenly between 2020-2022, with leisure hotels generally outperforming business hotels.⁵ According to STR, this trend began to level out in 2023 and is ongoing into 2024, as business travel is rebounding in major cities such as New York City, Las Vegas, Washington, D.C., Boston, and Houston due to recovering demand for hotels in both business-transient and group travel segments.⁵ Meanwhile, STR shows that the previously surging leisure demand in coastal markets has stabilized, realigning the hospitality market to normalized demand patterns.⁵

Figure 4: Hospitality Revenue per Available Room & Average Daily Rate by Year

Source: Hospitality, United States, CoStar Data, July 2024.

However, national recovery in hotel performance is still playing catch-up to pre-pandemic norms. At their recent 46th Annual NYU International Hospitality Industry Investment Conference, STR reduced their hotel performance forecast from their previous January 2024 edition, stating a “lower-than-expected performance” for 2024 so far and a reduced expectation of growth for H2 2024 in terms of hotel occupancy, Average Daily Rates (“ADR”) and Revenue Per Available Room (“RevPAR”).⁶ According to STR’s forecast, although RevPAR is expected to increase by 2.0% in 2024, Real RevPAR, meaning when accounting for inflation, is expected to remain -6.2% below 2019 levels in 2024 and is still on the path to recovery (See Figure 5).⁶

Figure 5: Hospitality Performance Metrics Recovery Forecast Figure5- OutlookH2-2024

Source: “STR, TE downgrade U.S. hotel forecast.” June, 2024.

According to CBRE’s U.S. Hotels State of the Union June 2024 Edition, national averages don’t tell the whole story.⁷ The report states that “half of the (geographic) markets are experiencing RevPAR growth and half are contracting,” with urban locations expected to outperform in their revenue growth driven by inbound international travel, group travel, and business transient sectors.⁷

With this variation in performance, the outlook also varies by the type of hotel. For example, with the overall high cost of living, STR and CoStar expect relative affordability to affect lower-to-middle-income household travelers and leisure travelers more than luxury and business-transient travelers, who are generally less sensitive to high inflation.⁶ We’re keeping in mind that the sector must absorb the effects of a decreasing savings rate and inflation on operations, both likely to affect hotel revenue in H2 2024.⁸

Transaction Activity

Per MSCI Real Capital Analytics, hospitality transactions fell 34% year-over-year, slightly better than the 39% decrease across the CRE market.¹⁰ The decline is partly attributable to overall debt illiquidity in the market, with relatively higher spreads on loans due to the operationally intensive nature of this sector. However, one significant transaction in the last 12 months influences this number. MSCI Real Capital Analytics reported that nearly half the transaction volume came from Blackstone selling the Biltmore Resort & Spa for $705m to Henderson Park and Pyramid Global. Without this deal, hotel transaction volume would've dropped over 60% annually.^10,11 Hotels were the only CRE asset type for which cap rates fell slightly in May 2024, attributable to limited-service hotels, but the trend has remained mostly flat since roughly 2023.¹⁰

CrowdStreet’s Strategy

Relative Value

The pandemic had a unique impact on the hospitality industry when occupancy hit 24.5% in April 2020.¹² Following this blow, we observed that the sector's pricing deviated from its trend, which we believe hindered the possibility of appreciation under normal circumstances. Combined with rising debt costs and market illiquidity, this pushed hotel deal prices further down.

Despite these challenges, we've seen prices relatively stabilize in 2024, mirroring last year's figures (which were relatively flat) but with prospects for further revenue growth, according to CoStar and STR.¹³ This suggests that the hospitality sector now offers greater relative value than pre-pandemic levels, especially in markets with continued momentum behind recovery.

Acquisitions over Development

With operating expenses such as labor, utilities, and insurance generally on the rise¹⁴, and due to hotels' operationally intensive business models, we are looking for a wide margin of safety for hospitality deals. This means we will consider projects with the potential for cash flow in the first few days of acquisition, especially those acquired below replacement costs, to help adequately cover the project’s debt service.

Given the hospitality sector's unique challenges, increased construction costs, and restrictive capital markets, development within the sector remains challenging.⁷ Until conditions for new hotel developments improve, we're mainly pivoting towards acquiring existing hotels. To avoid investments requiring significant repositioning or execution challenges, we intend to remain highly selective with any new construction projects or distressed hotels.

Recovering Markets

We will consider markets showing recovery in their performance indicators, recognizing that aiming only for those fully recovering to pre-pandemic levels is not essential. It's worth noting, however, that markets needing to fully recover may pose additional challenges in securing financing, as lenders generally remain hesitant, which, in our observation, could make even some top-performing markets face tougher financing challenges. A good test for hospitality recovery may be to observe the performance of newly developed hospitality projects because it typically takes time to build brand loyalty. When these projects start to perform optimally, it may increase lender confidence, making financing more accessible and help spur investment activity.