Commercial Magazine

When will the party end for the hospitality sector?

By Nick Villa

It’s the same old song and dance: Pent-up demand from people wanting to travel in the post-pandemic era will be a boon for the hospitality industry and hotel owners for years to come. And while that’s certainly been the case thus far in terms of revenue per available room (RevPAR) — a function of a hotel’s average daily rate multiplied by its occupancy level, which more than doubled in 2021 — how much longer should the good times for the hotel sector be expected to last?

First, let’s be clear that the good times being referred to should be viewed through the lens of leisure and hospitality operators, since consumers will undoubtedly have a thing or two to say about the price of their last hotel stay. But the reality is, higher prices for accommodations have been a wide-spread consequence of the post-pandemic recovery and consumers are justified in voicing their concerns. (After all, try speaking with a potential homebuyer who missed the boat on sub-3% mortgage rates and has seen property values only continue to climb.)

Nevertheless, inflation has remained above the Federal Reserve’s 2% target since November 2019. And while the Consumer Price Index has fallen considerably from its peak of 8.9% in June 2022, the headline increase this past August was still above target at 3.7%. There are several other concerns on the horizon that have the propensity to adversely impact consumers, with the most imminent being the recent resumption of student loan interest accruals and repayments.

Additionally, gasoline prices have increased by nearly 20% during the first eight months of this year, and a somewhat weaker dollar has tended to dampen international travel (albeit the conversions to euros or pounds are still more favorable than in 2019, while the dollar-to-yen exchange rate is near a multidecade high). These factors have resulted in U.S. consumers seeing their budgets squeezed as their excess savings continue to fall.

Consequently, as consumers reevaluate their discretionary budgets, a pullback in travel demand should be anticipated. This is especially true for leisure travel rather than business travel, as the price elasticity of demand for business travel is usually lower.

So, back to the question at hand: How long does Moody’s Analytics expect the good times to last for the U.S. hotel sector? While performance was exceptional in the first half of 2023, we expect a deceleration to occur in the latter half of the year. Specifically, national RevPAR increased by approximately 20% in the first six months of the year and is projected to rise an additional 7% by year’s end — hence, we forecast an annualized increase of roughly 27% relative to 2022.

Looking ahead to 2024, which becomes even less clear, we estimate an additional bump in RevPAR of about 6%. For perspective, the average year-over-year increase in RevPAR from 2001 to 2019, based on Moody’s Analytics data, was about 2%. Importantly, this long-term average omits the immediate post-pandemic data, given the extreme fluctuations experienced in 2020 and 2021 (which included a 65% decline and a 123% increase in RevPAR, respectively).

Visibility beyond 2024 in terms of financial and economic conditions is even more cloudy, but our current projections fall short of the aforementioned 2% long-term average. In summary, growth has already started to decelerate and it’s possible that the cyclical nature of the hotel industry moves in the other direction within the next 18 months.

It’s best to wait and see, but as illustrated on the accompanying chart, hospitality property owners can let the good times roll. RevPAR is projected to end this year 11.3% higher than its pre-pandemic level after three straight years below this threshold. ●


  • Nick Villa

    Nick Villa is an economist at Moody’s Analytics who specializes in commercial real estate. He is involved in research across property types and previously worked as a credit ratings analyst covering real estate investment trusts.

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