With inflation decelerating, fears of a recession receding, and supply growth muted, the overall outlook for U.S. hotel metrics in 2024 is one of modest, steady growth. The investment market is also showing increased signs of life, as inflationary concerns are diminishing and interest rates are improving modestly.
The U.S. lodging industry ended 2023 at 63.0% occupancy, a slight increase over 2022’s 62.7%. Strong growth in the first quarter was offset by modest declines in the latter three quarters, as outbound international travel increased and inbound international travel remained muted, particularly from APAC sources. The group segment continued to post strong year-over-year gains; business travel also improved, albeit at a more modest pace. Overall, ADR increased by 4.3% in 2023, supported by strong growth in the first quarter of the year. ADR growth faltered in the summer months, attributable to lower leisure demand related to a shift toward outbound tourism and widespread concerns about the economic outlook. However, ADR growth rallied in the fall, averaging 3.9% in the last four months of the year. As a result, RevPAR for the year was up 4.9% from the 2022 level, surpassing 2019 levels by 13.6%.
The national averages reflected in the following chart encompass a wide array of markets and trends. While this has always been the case, trends for 2023, similar to those in 2022, continued to reflect more widely divergent results than in prior years. Urban markets recorded the strongest RevPAR growthÑover 10%Ñwith notable improvements in both occupancy and ADR, supported by the ongoing recovery of the group and business segments. Suburban and airport markets also benefited from this trend, particularly in terms of ADR. More modest growth was recorded in the interstate, resort, and small metro/town markets; these areas had led the recovery in prior years, largely due to strong leisure demand, and are now experiencing some softening in occupancy and slowing ADR growth.
Recent National Metrics and Latest HVS Forecast
Source: STR (Historical), HVS (Forecast)
At 0.5% for the year, supply growth was well below historical norms in 2023. This can be attributed to the limited number of project starts during the height of the pandemic. Supply growth is expected to remain relatively low in the near term, as the pandemic-related trends are exacerbated by the limited availability of financing for new projects in the past 18 months.
With inflation decelerating, fears of a recession receding, and supply growth muted, the overall outlook for the hotel sector is one of modest, steady growth. Demand should continue to grow, supported by accelerating improvement in the group segment, which is the brightest component of the current outlook. Inbound international travel should also increase, offsetting the modest erosion in domestic leisure demand that is expected to continue in 2024. Nevertheless, leisure demand should remain well above pre-pandemic norms. Business travel is also anticipated to improve, although it is increasingly clear that office occupancy levels will not return to pre-pandemic levels. With hybrid work patterns the new normal, business travel is expected to be concentrated on midweek nights, to the detriment of Monday and Thursday nights. Overall, occupancy is forecast to increase modestly over the next several years.
ADR levels are also subject to the divergent trends influencing demand and occupancy, compounded by continued caution related to the economic outlook. These factors are expected to result in modest ADR growth in the near term, reaching the forecasted long-term inflation rate of 3.0% in 2026.
With inflationary concerns diminishing and the prospect of reductions to the rate in 2024, the investment market is showing increased signs of life. Since the meeting in early December, clients have reported a notable increase in lender interest, along with modest improvements in interest rates and debt coverage ratios. Essentially, the ceiling in the current cycle has been established, removing that uncertainty. However, the lower level of uncertainty does not mean significant improvement in clarity, as the timing and pace of future rate reductions are not known. Moreover, although recessionary fears have diminished, the outlook for the economy as a whole remains uncertain, exacerbated by concerns related to ongoing international conflicts and the vagaries of an election year. Thus, lenders and investors are expected to remain cautious as we move through the initial months of this improving cycle.
About Anne R. Lloyd-Jones
Anne R. Lloyd-Jones, MAI, CRE, is the Director of Consulting & Valuation Services, National Practice Leader at HVS, the premier global hospitality consulting firm. Since joining HVS in 1982, Anne has provided consulting and appraisal services for over 5,000 hotels. Anne’s particular areas of expertise include market studies, feasibility analyses, and appraisals. She is also an expert in the valuation of management and franchise companies, as well as brands. Her experience includes a wide range of property types, including spas and conference centers. She has appeared as an expert witness on numerous occasions, providing testimony and litigation support on matters involving bankruptcy proceedings, civil litigation, and arbitration. For further information, please contact Anne at 1 (914) 772-1570 or [email protected].
About McKenna Luke
McKenna Luke, MAI, a Managing Director with HVS, is an expert in the lodging markets of the Southwest region, particularly in New Mexico and Arizona. McKenna’s background in hospitality spans from hotel operations to advisory roles related to full-service hotel acquisitions and new developments. Her expertise includes small independent inns, complex resorts, full-service metropolitan hotels, and historic conversions. McKenna has extensive nationwide hotel consulting and valuation experience having lived and worked in Colorado, Texas, Missouri, Oklahoma, South Carolina and, most recently, New Mexico. In addition to traditional hospitality work, she has conducted appraisals of casino operations in Las Vegas, Atlantic City, and Pennsylvania, as well as ski resorts in California, Montana, North Carolina, and Canada. McKenna graduated summa cum laude from the University of Denver, from which she later earned an MBA. She holds a certified general appraisal license and is a Designated Member of the Appraisal Institute (MAI). Contact McKenna at 1 (303) 704-2636 or [email protected].