The resulting white paper, titled “Hotel Borrowing Costs are Rising—But So Are Occupancy Rates,” projects positive outcomes based upon rising demand that will bolster key industry metrics, such as occupancy rates, ADR and RevPAR, while new construction is down to 2015 levels.
“We expect this year’s report will arm industry stakeholders with valuable information to help move their businesses forward,” said Sean Hennessey, associate professor, NYU SPS Tisch Center of Hospitality and contributor to this white paper. “While inflation increases operating costs, it can also help accelerate room rate growth. Further, interest rates rise in an inflationary environment, which affects the feasibility of new construction. On balance, the profitability outlook is attractive.”
Tom McCaleb, managing director/partner, BCG, added, “Uncertainty, inflationary fears and elevated interest rates will likely be with us for a while. All can have a chilling effect on hospitality investment. Despite these concerns, our latest work with the Tisch Center shows that strong room demand will keep the hospitality industry an attractive investment for the foreseeable future.”
Survey highlights
While the NYU SPS/BCG analysis is far from gloom and doom for the hospitality industry, here are a few top-line results from the survey:
Guest demand: A major source of optimism
- More than 70% of survey respondents anticipate demand will at least somewhat increase by the end of 2023, and 42% expect significant increases in 2024.
- Hoteliers are looking for nominal revenue increases of 4.6% to 5.1% in 2023. Those expecting a significant increase in demand anticipate revenues to rise by about 12%.
- Real growth rates seem likely to exceed the rate of inflation. The revenue increases will be driven by both volume and price.
- Hoteliers expect room rates to rise by 8.3% to 8.8% over the next 18 months, expanding gross margins by about six percentage points.
Interest rates: The biggest threat for investors
- Even though hotel industry participants expect the inflation rate to drop below 5% by the end of 2024, they are nonetheless wary.
- High interest rates spook investors in hotels as in other commercial property sectors. In the current environment, 82% of hotel owners view the hotel industry as less attractive than other investment classes.
- The industry is approaching a trigger point. A summary of recent hotel financings shows spreads topping out at 400 basis points above the secured overnight financing rate (SOFR), which itself is approaching 5%. When borrowing costs exceed 8%.
- In this survey, 89% of hoteliers consider rates above 8% unacceptable for taking out a loan.
Persistent labor challenges add to investor reticence
- Prolonged staffing shortages add to investor concerns; 70% of hotel owners view the hotel industry as less attractive if labor problems persist.
- More than 60% of respondents reported that they are somewhat or severely short-staffed, which NYU SPS/BCG estimate costs hoteliers about seven percentage points of revenue and two points of operating margin.
- More than 75% of respondents experienced modest or better labor productivity gains in the last three years and are optimistic about improving employment going forward. More than 60% expect continued improvements in 2023, and 100% expect significant improvements in 2024.
- Two challenges still need to be solved in this area: the number of job openings and decreases in real earning potential for industry workers.
