Hotels Stick to Upbeat Forecasts Even With Concerns Over Cooling Demand

The post-pandemic boom in travel pushed hotel rates to record highs in recent months. Yet rising interest rates and energy costs could endanger the recovery.

So far, the CEOs of major hotel groups have been forecasting a sustained boom for their businesses for the rest of this year. But their comments come as warning lights flash on economic dashboards in the U.S, Europe, and elsewhere.

At Hyatt, executives said they had seen no slowdown in bookings at the all-inclusive resorts at the recently acquired Apple Leisure Group. Resorts tend to be reserved in advance, and Hyatt said about a quarter of its all-inclusive business for the early months of 2023 is already on the books.

This upbeat news fits with a broader industry pattern. The U.S. hotel industry reported record-high monthly room rates in July on a nominal basis, according to market intelligence firm STR.

The rest of the Hyatt portfolio depends more on business demand, which remains depressed compared with pre-pandemic levels. Yet executives are upbeat. While demand remains below pre-pandemic levels, Hyatt and other hotel companies are finding ways to extract profit.

“The core Hyatt brands are seeing a nice inflection in group demand, with an acute pickup in in-the- year-for-the-year at significantly higher than 2019 rooms and banquet pricing, as well as a nice pickup in the business transient segment,” noted JP Morgan’s research analysts in a report this month.

Hyatt’s group bookings for August through December are only 7 percent below 2019 levels. The company is also driving more profit from group business. In the second quarter, banquet costs, which represented 46 percent of the group revenue base, had margins of 51 percent, JP Morgan noted. The drivers were strong pricing power and Hyatt-specific cost improvements, such as improved analytics and software helping to capture more business more efficiently.

Yet hotel company gains come against a backdrop of economic concerns piling up, such as a growing energy crisis in Europe. There’s an inclination by some to assume the travel sector will be negatively affected.

Analysts debate the question. The average traveler tends to have more disposable income and more stable finances than the average citizen, and they may prove more resilient in travel spending than some expect in a garden variety recession.

“We still do think there is going to be shrinking demand for travel,” said Katie Briscoe, incoming CEO of MMGY, an integrated marketing group with a division that does recurring traveler sentiment research. “We just don’t expect the impact to be as great on travel as on some other sectors.”

Another part of the equation is the cost of operations. Assuming they can continue to charge higher-than-historical rates from lower-than-usual guest numbers, hotel companies also need to keep their costs in line. Inflation, especially for energy costs, makes that harder.

“I don’t know the level of inflation on the running business going forward,” said Jean-Jacques Morin, deputy CEO and chief financial officer of Accor, during a recent earnings call. “Nobody really knows.”

Morin emphasized that several demand drivers may enable Accor to pass along price hikes to travelers. In Western Europe, for example, several events, such as Germany’s Oktoberfest and the Paris Auto Show, look set to draw strong demand from travelers who haven’t attended them for years because of the pandemic.

Resilience may be the watchword of many hotel executives, but many leisure travelers may have hit their limit on how much they’ll pay for hotel rooms. A consumer sentiment survey by Morning Consult, a New York-based intelligence company, saw a weakening in intention to travel among U.S. travelers, but not European ones, in July.

At Choice Hotels, roughly two-thirds of its revenue is drawn from leisure travel, mostly for U.S. domestic trips. The company has seen its average daily rates stay at roughly 9 percent above 2019 levels since September 2021.

“We see as a difficult environment to grow room rates on top of near double-digit percentage increases compared to 2019 that Choice has been capturing,” wrote Robin Margaret Farley, an analyst at UBS, in a report this month.

Hotel groups as a whole haven’t lowered their forecasts for signing new hotels. But several industry practitioners have told us anecdotally that hotel dealmaking has begun to stutter as capital lenders become more cautious while waiting to see the trajectory of interest rates.

“There’s very little financing going on,” said Andrew Benioff, a hotel developer based in Philadelphia and the founder and chairman of the Independent Lodging Congress.

“There’s a disconnect in the capital markets between what we call cap rates and financing rates,” Benioff said. “Essentially, owners won’t let go of the sky-high valuations they want, but buyers are having a tougher time getting lenders to agree to finance deals at high transaction prices, given rising interest rates and other opaqueness in the capital markets.”

Other disruptions are impacting hotel pipelines.

“What we see is that the pipeline has definitely declined to below average,” said John Hardy, chairman of The Hardy Group, an Atlanta-based hospitality construction management company. “A labor shortage and supply chain issues are some of the factors.”

“I see those stats that the big hotel groups put out,” Hardy said. “But I don’t know how accurate those numbers are.”