Like many other sectors of commercial real estate, the hospitality industry is entering a new normal as it seeks firm footing after severe ups and downs brought on by the COVID-19 pandemic. Hospitality now must deal with less business travel, a cooling of the leisure travel market and higher costs. In June, Scotsman Guide spoke with Tom Rowley, an executive managing director for Cushman & Wakefield and the U.S. practice lead for the hospitality and leisure practice group. Rowley discussed the state of the hospitality industry and when we can expect an uptick in hotel deals.
Your year-end overview for the lodging industry discussed the sector finding a new normal. What does that normal look like?
We’ve seen a slow return to in-office work, although it’s increasing. There is an increase in corporate and government travel in the form of two- and three-day meetings. The teams will come together for two or three days in a certain city and use a hotel meeting space. So, we are seeing teams gather, but we are not having just the strictly corporate travel we used to see, where travelers would come in on Monday and leave on Tuesday. There is also a decline in general leisure travel. We are starting to see a segmentation of the industry, with a slowdown in the economy scale first, followed by the lower mid-scale. The luxury segment is still performing great and has room to grow.
The in-person business travel appears to be recovering better than most people expected and is near 2019 levels.
Yes, it’s doing well. I think everyone has rose-colored memories of the industry, pre-pandemic. The business travel sector was doing well, and we are seeing it come back. But it’s just a little bit different in its makeup and how it’s coming back. It is tough when you say business travel is coming back as a blanket statement across the country because there are certainly markets that are faring better than others. For instance, business travel is not back in San Francisco. It was slow to come back to Boston, New York City and Washington, D.C. Those markets are doing well now, but we are starting to see some taper. Miami and some Sun Belt markets are doing well. Seattle and Portland were having struggles, but Seattle is starting to show a resurgence.
Revenue per available room (RevPAR), a popular gauge for industry health, appears to be growing, even though the supply of rooms is at an all-time high.
I think all the industry leaders have pretty much readjusted their RevPAR gains for 2024 down a little bit. Everyone is starting to feel a slowdown. We are still seeing a good average daily rate growth (ADR) for an occupied room. We are not on the tear we experienced coming out of the pandemic, but we are seeing good growth. Again, it’s market by market. There is also a slip in occupancy because we are just not quite having the strength of leisure travelers we’ve seen during the past couple of years. But keep in mind that when we see a slip in RevPAR for the first half of 2024, that is in comparison to 2023, which had a fantastic first half. Leisure travel tends to slow down in an election year and in the second half of the year, certainly in the fourth quarter. So, we expect travel to slow down until the election is decided. I expect it to be pretty slow in the fourth quarter.
At the end of 2023, industry experts estimated 152,000 units were under construction. Will those hotel rooms materialize?
We’ve definitely seen that a lot of those deliveries have stalled. That is attributed to the cost of capital. Some hotels just may not pencil-out under the current debt structure. So, some of those hotels have been pushed out a little bit farther into 2025 or even 2026. If you don’t have to build it right now, I’m not sure that you would in a lot of markets. Debt is really expensive. So, those that could hit the pause button on construction have done so.
Are you seeing the buying and selling of many hotels?
Activity is down considerably, and that’s really due to the bid-ask spread between the buyers and sellers. We are seeing a tightening there, but the cost of what someone can acquire debt for right now and then meet the yield requirements for their investors or for a fund is high. That is opposed to the position of the seller who may have debt at a considerably lower rate and has experienced nothing but RevPAR gains in recent years. The spread between those two is still pretty far apart. So, transactionally we’ve not seen a halt, but it’s a near halt. We expect the spread to tighten as RevPAR gains slow and as sellers come to the point where they have to refinance their loans, or they have a large capital expenditure coming up or for some other reason. We are hoping to see more transaction activity in the second half of the year.
