Historically high hotel prices — in this economy?
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Hotel companies during the pandemic advise hoteliers to keep prices relatively normal, as discounted prices will discourage people from booking during the health crisis and lockdown. That allowed hotel companies to bounce back from the pandemic’s lows much faster than in any previous recession.
But with the economy in today’s uncertain territory, surely the old play of discount rates must be considered, right?
Wrong.
The Federal Reserve’s efforts to curb inflation have involved raising interest rates, including a 0.25% increase this week alone. That makes borrowing money to build things like real estate developments, including hotels, more expensive.
Even in the best cases, building hotels in the US is a daunting task, as high construction costs for materials and labor as well as supply chain issues have kept many projects out of reach. delayed. Any headwinds on the construction front will mean less new supply hitting the market.
Shrinking supply alongside improving demand drivers such as international and business travel means higher hotel prices are likely to continue to rise.
For example, building on Dream Las Vegas, part of Dream Hotel Group recently acquired by Hyatt division, halted this month amid stalled financial plans, Las Vegas Review-Journal reports. The developer behind the hotel blamed rising interest rates as part of the delay in construction.
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Additional circumstances of this may aggravate the situation. Fewer hotel rooms hit the market amid recovering demand which means prices will only go higher.
“From an industry fundamental point of view, we continue to feel very satisfied with everything. Those are the basics [of] supply and demand – that’s what ultimately leads to results,” Hilton CEO Christopher Nassetta said last month about hotel prices during the company’s fourth-quarter earnings call. “The supply side is quite quiet. We’re currently experiencing — the US market, our largest market, for example — with the lowest supply we’ve ever seen.”
A wave of tech layoffs, a banking crisis and worries about inflation paint a bleak economic picture, but the hospitality sector continues to thrive.
Along with being the top source of job creation for the past few months with better-than-expected jobs reports, hotel companies reported huge profits for 2022 during the most recent earnings season. Great hotel executives seem marvel at the possibilities to charge higher, and it It doesn’t look like the trend is going away with uncertainty in financial markets.
According to STR data, luxury hotels in the US last week outperformed by 24% compared to 2019. The overall performance of US hotels is 10.4% higher than in 2019.
The case of the hotel room disappearing
Don’t look for relief in the form of new hotels opening anytime soon.
“Even before higher interest rates and the banking crisis, new hotel supply was quite meager on a relative basis,” said Daniel Lesser, CEO of LW Hospitality Advisors. “Now, eight to nine months later, with rising interest rates and a banking crisis, it will be a challenge to get financing even when running hotels that make money. It will be much more difficult to cut construction finance for a new project.”
While there have been signs that hotel construction is starting to improve slightly this year, the overall US hotel construction system of rooms under active construction has not returned to previous levels. epidemic.
Hotel companies can see growth, but that’s helped in part by conversions — transactions in which existing hotel owners agree to convert their properties to a franchise. new brand. That usually doesn’t add many hotel rooms to the market. Sometimes it even means reduce the number of rooms.
Furthermore, a significant number of hotel rooms have left the system entirely during the pandemic, as many owners have redeveloped the hotel into alternative uses. This ranges from smaller hotels converted into residences to larger ones, like New York City’s Pennsylvania Hotel, being demolished for new real estate development.
“We are still seeing a large number of older hotels that are outdated in terms of functionality and material. [products] converted to alternative uses or discarded for new development,” Lesser said. “CEOs see that new supply is being muted and will continue to be muted, and that will only put pressure on pricing power.”
Is any relief in sight?
Rome wasn’t built in a day, and neither are hotels. Sure, there must be some kind of relief for tourists. After all, entertainment demand remains high and the business, group and international travel sectors are making a comeback. Strong demand drivers often encourage developers to continue with new hotel projects to meet demand for more rooms.
Hotel companies may show slight increases in their respective sizes for the year, but that still might not be enough to bring down skyrocketing room rates — especially at higher-end hotels.
“There’s definitely not going to be a surplus of new supply,” said Patrick Scholes, managing director of residential and leisure equity research at Truist Securities. “There are definitely some cities that have a lot of new supply [like Nashville and New York]. But for the most part, there is little new supply, if any. Where you see the supply is going to be… your mid-range brands, many of which are Hilton or Marriott varieties, or even Wyndham’s new Echo brand.”
High interest rates can eventually reduce inflation, but they are not conducive to making hotel transactions and making a profit.
Very few transactions were made and “trading volumes for European real estate have plummeted as investors struggle to underwrite deals in the face of an uncertain outlook on interest rates, ‘ said one expert. Bloomberg report from MIPIM, an annual global commercial real estate conference held earlier this month in Cannes, France.
One of the few deals announced during the conference was the purchase of the Pullman hotel in Cannes, but it’s an existing property — not necessarily a sign of new construction opening up more European hotel supply to help. discount for your summer vacation.
Both the heads of the Fed and the European Central Bank have noted in recent comments that reducing inflation is their top priority. Raising interest rates is their main tool to do that.
If commercial real estate remains crippled by high interest rates, tensions in the tourism sector will remain: Many people still want to stay in hotels, but developers don’t have the financial tools to generate more resources supply to meet that demand.
Until that changes, it’s still a scenario where it’s great to own a hotel — and not so great to be a pay-per-night.
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