Both 2022 and 2023 were banner years for U.S. hotels. But owners and operators may face more headwinds when it comes to bottom-line profitability in 2024.
Hoteliers in many U.S. markets in 2022 and 2023 found travelers willing to pay higher room rates post-pandemic. Robust pricing allowed many operators to keep pace with inflationary operational costs and debt service payments.
Yet strong demand wasn’t enough. Last year, profit margins contracted 1.3 percentage points, and gross operating margins may continue to be pressured in 2024.
“CBRE expects U.S. hotel margins to remain under pressure in 2024 as its outlook for 0.7% employment growth and 2.5% growth in consumer price inflation are likely to lead to wage increases above its forecasted 3% RevPAR [revenue per available room] growth forecast,” Rachael Rothman, head of hotels research and data analytics, said in a Skift interview.
Here are a few factors that may boost or hinder hotel profitability in 2024.
Location, Location, Location
National averages and forecasts are only partly useful for owners of a particular property in a market facing particular local dynamics.
Last year was great for running a business-focused hotel in most major U.S. gateway cities. New York City led the country’s top 25 markets regarding average gross operating profit per available room, according to October 2023 data from the profit-and-loss sheets of thousands of hotels participating in research by CoStar’s STR.
The reason was that business people — traveling independently and in groups — continued to ramp up their hotel spending.
But if your hotel relied a lot on leisure travelers, you may have seen some backsliding in profitability after the post-pandemic surge petered out. Enough vacation-goers switched from domestic to international destinations last year, and some smaller destinations saw fewer crowds.
Austin, for example, saw its number of rooms sold drop by 100,000 between July and September. The Texan town’s occupancy in October was about 10% below 2019 levels.
Cities that rely on a stream of international visitors also continued to hurt. San Francisco saw its average gross operating profit per available room drop about 7% in October. Hotel operational costs rose while demand remained relatively stagnant.
Uncertainties About 2024 Travel Demand
How profitable your hotel may be this year will partly depend on the type of travelers it attracts and what behavior those travelers exhibit.
“Luxury hotels that had been seeing purely high-end luxury travelers right after the pandemic are now getting more group bookings for events which are at discounted rates, so year-over-year to December, luxury room rates are down even though the hotels are still having relatively good occupancy,” said Jan Freitag, national director of hospitality analytics at CoStar Group.
“Economy room rates are down year-over-year because occupancy is down 5%, as lots of travelers shifted to overseas vacations,” Freitag said. “Yet upscale and upper-upscale type properties are seeing rising rates because of the return of business travelers to closer to 2019 levels.”
“The question is what will happen this year,” Freitag said. “Will American travelers say, let’s go back to the Rockies or California or will they still want to travel internationally or will they pull back on travel budgets in general? Will we have more international inbound travelers, or will visa and exchange rate issues keep discouraging that?”
Three operational costs hoteliers will be especially watching will be debt servicing, labor costs, and third-party distribution costs.
On the labor front, hotels have been seeing wage growth outpace general consumer price inflation for the past seven months.
In November, hotel wages were up 5.3% year-over-year, a pace of growth that was higher than the 4% pace between 2017 and 2020, CBRE said using government labor data.
If hotel wage growth outpaces demand growth, some hotels may see profits pinched.
Distribution costs are another thing to watch. Hotels depending on leisure travelers who see weakening in demand may lean into seeking demand from online travel agencies, raising their average cost of acquiring guests and potentially hurting profits.
Over $25 billion in hotel commercial mortgage-backed securities will come due in 2024, according to CoStar. Some hotel owners and investors will struggle to cope.
Some companies may selectively default on some types of debt. In recent weeks, Highgate missed making a payment on a $250 million interest-only financing from Blackstone for the Hyatt Regency Downtown SOMA in San Francisco, The Real Deal reported.
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Photo credit: Loews Arlington Hotel in Texas will open in April with two resort-style swimming pools. Source: Loews.