“The beginning of the year was a challenging period for the industry,” said Ryan Meliker, president/cofounder, Lodging Analytics Research & Consulting (LARC). “Limited RevPAR growth led to margin and hotel EBITDA and NOI erosion in the first few months of the year. On top of that, elevated interest rates have increased debt service, which further weighs on cash flow.”
The first half of 2024 was a tale of two quarters, he said. The first quarter underperformed, Meliker noted, with RevPAR growth of just 0.2%. However, March was the most challenged month of the quarter with difficult Easter comparisons. April and May saw improvements in RevPAR growth as year-over-year comparisons began to ease—and April benefitted from the Easter shift and the solar eclipse.
“Overall, we expect the second quarter to have the strongest year-over-year RevPAR growth of the year,” he said.
Meliker pointed to a number of challenges that remain as well, including waning domestic leisure demand that will limit RevPAR growth in the near term. Additionally, corporate transient demand growth continues to modestly improve but with low office utilization levels, so he doesn’t expect it to recover to pre-pandemic levels.
On top of this, expenses are growing at a faster rate than revenues in many markets, and while overall labor expense increases are moderating, there are several major markets that face higher wage resets in the coming years.
“With interest rates expected to stay higher for longer, there will not be a reprieve from elevated debt service costs in the near term,” Meliker added.
In terms of managing these obstacles, he said, it comes down to accepting the realities.
“On the top line, that involves attempting to mix shift away from domestic leisure demand,” Meliker said. “On the expense line, that involves managing costs more aggressively. Regarding debt service, there is not much hoteliers can do, which means in certain cases they should look to sell rather than wait for the cost of debt to decline.”
Meliker expects RevPAR growth to end the year up 1.8%, driven by a 2.6% increase in ADR and 0.8% increase in occupancy.
“That means that RevPAR growth will be strongest in Q2, weakest in Q1, while Q3 and Q4 will be impacted by the Jewish holiday calendar shift into October (positive for September, negative for October),” he added.
The industry’s biggest challenge, according to Isaac Collazo, VP, analytics, STR, is managing demand for profitability.
“While ADR has grown strongly since the end of the pandemic, most hotels continue to have real (inflation-adjusted) RevPAR that is below 2019, meaning profitability is still not where it once was,” Collazo said. “Operating costs are expected to rise further. Roughly two-thirds of the top 25 markets have realized YTD TRevPAR (total revenue per available room) increases in 2024. However, operating expenses, especially labor costs, are especially high in these top markets and it is getting more difficult to drive profits, leaving less than half of the top markets to grow GOPPAR this year.”
Collazo expects RevPAR growth to strengthen; based on preliminary June performance, RevPAR is up 1.5%. By the end of the year, he expects RevPAR to have increased by 2%.
“Travel is still a desire for most individuals, but the high cost of living is holding them back,” Collazo said. “Value for the money is taking on a higher importance, which hotels will need to balance along with their own profitability.”
The softness in demand surprised Collazo so far this year, especially in the lower-tier segments.
“We attribute some of the decline to the compounding effects of inflation, particularly among lower and—to a lesser extent—middle-income households,” he said. “Outbound travel has not slowed but has continued to increase. This is holding back domestic travel and room nights from individuals who tend to spend more.”
According to Robert Cole, president/CEO, Hospitality Ventures Management Group (HVMG), the labor situation has improved, but revenue growth has decelerated and expense pressure continues to be intense, creating ongoing margin pressure.
“All of that said, we’re still seeing net growth on the top and bottom lines, but not at the pace we anticipated heading into 2024,” he noted. “Our back half of the year is a little more optimistic than the first six months, especially since the year-over-year comparisons get a little easier.”
Cole added that from a revenue standpoint, business travel has stabilized below the previous peak, and most of the business travel has shifted to the group and retail segments.
“We have reached a point where price sensitivity over off-peak times and days is creating a very competitive environment to win business,” he said. ” This is not new in our business, especially as market growth decelerates. Winning strategies always include placing the guest experience first and then delivering a high value for the price paid. These dynamics make maintaining and improving profitability a function of being innovative in how we deliver the guest experience, drive ancillary revenue and maximize flow through to the bottom line.”
Cole expects a choppy, continued forecast and market-by-market volatility, but on the whole, positive growth for the rest of 2024.
How operators see it
The feelings about the first half of the year was similar on the operational side. Joseph Bojanowski, president, PM Hotel Group, felt the first half was disappointing and below expectations in terms of year-over-year RevPAR growth in Q1 and the continuing erosion of GOP margins.
“While we are seeing moderating but still solid revenue growth, higher operating expenses are impacting profit margins,” Bojanowski said. “Workforce shortages are one of the drivers of the higher operating expenses. We continue to focus on associate retention; attracting new talent to our hotels and our industry; and adopting technology where possible to create efficiencies and lower operating costs.”
PM Hotel Group operates primarily in the top 25 markets, and the year-over-year performance has been very choppy, according to its president.
“Some of the markets in which we operate have double-digit RevPAR growth, while others have year-over-year decline in the mid-single digits compared to last year. Overall, the top 25 markets are outperforming the U.S. with urban and airport locations leading the way.”
As for the remainder of the year, Bojanowski is seeing a slowing of year-over-year growth in occupancy, primarily driven by a flattening of leisure transient demand and continued slow growth in business transient demand.
“Expectation for the second half of the year is a year-over-year decline in leisure demand, modest growth in group and muted growth in business transient as some companies press pause until the presidential election in November,” he said.
Bojanowski added that traveling for concerts and sports events, traveling to lower-cost destinations that offer similar experiences to more expensive destinations and wellness-focused travel are on the rise, and PM has implanted changes to the way it markets the hotels and prices the hotels around special events. This includes adding more packages focused on experiences for event-related travelers, bundled packages for the more cost-conscious travelers and for the wellness traveler partnerships with spas, outdoor activities and healthy menu options for food and beverage.
“Our focus on profit per reservation is higher than it has ever been, distribution channel management is critical, as well as bundling to drive ancillary revenues and pricing for perceived value to the guest versus a solely demand-based pricing model,” he added.
According to Erica Lipscomb, SVP, revenue strategy, Crescent Hotels & Resorts, leisure travel remains strong, although international inbound travel still hasn’t reached the levels seen in 2019.
“On the other hand, U.S. outbound travel is on the rise, supported by a stronger dollar,” she said. “Urban areas are also experiencing a comeback in both group and corporate business travel, indicating a recovery in these sectors. However, the overall growth of the industry is being tempered by increasing operational costs.”
Despite a slower start than anticipated in the first four months, Lipscomb said there’s a sense of optimism following a stronger RevPAR performance in May, driven by growth in occupancy and ADR.
“The top 25 markets spearheaded this growth. Looking ahead, there is potential for continued improvement across the rest of 2024, as each market segment shows promise for further demand growth,” she said.
With U.S. occupancy levels remaining softer than anticipated for this year, Crescent is focused on securing a stronger base with an elongated booking window.
“Again, May’s performance gives optimism for a stronger second half of the year with recovery in international inbound travel, group meetings and business travel,” Lipscomb said.
As for guest preferences, she said that travelers are still looking for customized experiences and that technology, sustainability and personalization remain at the top of evolving preferences.
“Our hotels partner with local businesses, tour guides and artisans to provide immersive experiences,” she added. “As customers enjoy engagement throughout their booking journey, we leverage marketing tools to offer additional amenities, experiences, personalized services and wellness programs, she said.
In terms of revenue management, Lipscomb said that in an uncertain market, a group base is the key to success.
“It is critical to utilize strategies to elongate the booking window, layer a strong occupancy and leverage ADR opportunities based on market demand,” she said. “Utilizing revenue management systems and BI tools will become increasingly important to determine demand by channel and segment to set retail rates by season and booking window.”
Optimism and opportunity
Despite the first half’s hurdles and lingering challenges, the experts shared a similar sentiment of optimism and recognized an abundance of opportunity.
“There are two major opportunities facing the U.S. hotel industry,” Meliker said. “First, is a tremendous amount of pent-up demand from foreigners for travel to the U.S. As the dollar falls in value (as expected later this year and next year), hoteliers should look to absorb as much of that demand as possible. Second, we expect lower office utilization levels to lead to more group demand and hotels able to increase their group mix will gain RevPAR index over the near-term.”
He added, “Rising construction costs and elevated cost of debt has made new development challenging. With that said, developers always find a way to develop, and we continue to see hotels begin construction. Well-capitalized developers are best positioned to take advantage of a low supply growth period, where new hotels can gain outsized share, given the limited number of them.”
And, despite muted RevPAR growth and challenging expense growth, Meliker said that LARC’s outlook for future industry-wide performance is positive and he expects hotel values to move higher.
“We estimate that hotel values will increase 4% in 2024 and a total of 11% over the next five years,” he said.
Others pointed to the flexibility of the hospitality industry and its ability to bounce back time and time again.
“The hotel industry is resilient,” Lipscomb said. “We can adapt and innovate to meet changing customer needs and preferences. With diversified offerings, we are able to target different segments of customers—leverage that.”
Tags: Crescent Hotels, Erica Lipscomb, Hospitality Ventures Management Group (HVMG), Isaac Collazo, Joseph Bojanowski, LARC, PM Hotel Group, Robert Cole, Ryan Meliker, STR
