Is the Hotel Real Estate Market Revival Here to Stay?

Hotel revenue plummeted in 2020 as COVID-19 prompted worldwide travel restrictions and self-quarantine orders, but it has begun to recover recently.

The market struggled over the last few years as corporations replaced  business trips with virtual meetings. And the public  spent their vacation money on home entertainment, furnishings, and food deliveries. With national and local governments lifting coronavirus constraints this year, consumers have finally been taking long-overdue vacations.

The American Hotel and Lodging Association (AHLA) published a report predicting U.S. hotel leisure travel revenue in 2022 will exceed 2019 totals by 14%. The sector’s renewed strength saw Q1  hotel real estate sales exceed $12.5 billion, its highest first-quarter result since 2019. Unfortunately,  looming economic anxiety could reverse the market’s progress next year and weaken demand for the property type. 

Should real estate developers launch new hotel projects with a recession looming? Here’s a closer look at the different factors impacting the long-term health of the hotel market.

A Rising Tide Isn’t Raising All Ships

The AHLA anticipates that American hotel revenue will reach $178 billion this year, up from $166.7 billion in 2019. Its forecast also considerably surpasses the segment’s  COVID-hampered totals in 2020 ($85.7 billion) and 2021 ($141.6 billion). But the organization’s projection varies significantly by region and travel type, indicating the market needs much more time to recover.

The AHLA’s data indicates consumer interest in vacationing will push hotel leisure travel revenue to $97.8 billion in 2022. 80% of the top 50 U.S. markets are on track to beat their pre-pandemic returns, with Sunshine State leading the pack. Hotels in vacation hotspots Miami (33%), Fort Lauderdale (35%), and Tampa (44%) are on track to substantially improve on their 2019 financial performance.

However, the Association predicts national hotel business travel revenue will be significantly behind leisure travel income.

Only 40% of hotels in the top 50 U.S. markets for business travel are expected to exceed their 2019 revenues this year. New York City (22.40%), Washington DC (28.20%), and San Francisco (40.10%) are anticipated to record significant year-over-year declines in 2022. The hotel sector’s traditional biggest source of income will be down by  a projected $20 billion compared to 2019.

Virtual meetings rising to prominence in the business world since the pandemic began partially explains the downturn. Vijay Dandapani, President and CEO of the Hotel Association of New York, told  Commercial Observer the problem is more complicated. Visa processing logjams in the U.S., and Brazil and India’s COVID restrictions are hurting international business travel. He said New York City lost 17,000 hotel rooms since the pandemic began. Consequently, he thinks the local market will fully recover in 2024.

The San Diego Business Journal reported the nationwide  drop off in business travel contributed to the slowdown of the California hotel market this year. Sales in the state fell by 9.9% in the first six months of the year, and total dollar volume dipped by 33.6%.

The Impact of Economic Anxiety on the Hotel Sector

Although the hotel sector is rebounding from the impact of COVID-19, economic anxiety could be a major obstacle to its comeback.

Mounting interest and mortgage rates are affecting activity in the  retail and  housing markets, and analysts believe those sectors won’t return to normal until 2023. Moreover, most hotel industry executives admitted the  U.S. economy is in a recession during the recent Lodging Industry Investment Council meeting. But many attendees hope the downturn won't significantly diminish corporate and consumer interest in traveling.

A recent survey conducted by  Destination Analysts validates the hoteliers’ positive outlook. Over 54% of respondents said traveling within the next three months is a budget priority. The questionnaire also revealed that 74.8% of participants believe traveling is a good investment even with a recession looming, and 65.6% selected  luxury hotel experiences as a way to relax. Though more Millennials and people from high-income households believe travel is essential than other demographics, the sentiment is broadly popular.

Consumers are aware economic contraction is on the horizon, but they aren’t worried enough to cancel their plans.

Why Real Estate Developers Might Want to Hold Off on Launching Hotel Projects

Despite the hotel market’s recent recovery, launching projects in the asset class is a big gamble for real estate developers.

Destination Analysts’ data supports the AHLA’s assertion that 2022 will break the two-year streak of annual hotel revenue. People who put off their vacations because of the pandemic want to get out into the world. But what happens after all that pent-up demand is realized? The sector has limited visibility for 2023 due to prevalent economic uncertainty.

Although inflation is driving up prices for groceries, fuel, and rent, the  U.S. unemployment rate stood at 3.5% in September. Unless next year brings a deeper recession than experts predict, the hotel market could continue its recovery uninterrupted. However, multiple large employers, including Phillips, Credit Suisse, Snap, and Ford, have laid off  thousands of workers in the last two quarters because of macroeconomic challenges. If the American economic environment doesn’t rebound soon, more mass job cuts could happen next year.

In that scenario, demand for leisure travel could fall as consumers reassess their spending priorities, especially with inflation driving up room costs.

In addition, CBRE recently forecasted that annual hotel revenue performance would increase 14.7% this year, up from its previous estimate of13.1%. But it also warned new coronavirus outbreaks and a recession could undercut its projection. The analytics provider believes high raw material expenses will make  hotel development cost prohibitive in the long term. The group also believes the hotel supply will have a compound annual growth rate of 1.1% over the next five years, lower than the sector’s traditional 1.8% CAGR.

Developers might be best served by pursuing opportunities in less volatile sectors until conditions improve. Launching a complex hotel project soon, even though analysts don't expect business travel to  normalize until 2025, carries significant risk.

But there are other asset classes that offer more stability. Download our  4 Recession Proof Asset Classes white paper to find out which property types are highly resistant to economic headwinds.