By the Numbers Hospitality

Room for Growth

The hospitality sector is on the mend after a prolonged period of steady uncertainty.

Uncertainty has abounded in the hotel sector over the past 2 1/2 years as the pandemic made both leisure and business travel difficult or impossible. While holiday travel rebounded significantly throughout 2021 as travel restrictions were lifted, the rise of the delta and omicron variants dampened leisure travel in the second half of 2021, further delayed any significant recovery in business travel, and had spillover effects into the hotel sector. Travel was also off to a less-than-salubrious start this year, as omicron cases surged in January before declining in February. Since then, travel requirements have eased both in the U.S. and abroad, as have city- and statewide mandates for tourist-related activities — an encouraging development for the hotel sector.

The traveler recovery ratio steadily climbed in 2021, particularly in the second half of the year, peaking for the year at 90.1 percent during the Thanksgiving weekend. With the proliferation of the omicron variant as well as the typical seasonality of travel at the start of a new year, however, the recovery ratio fell back down to between 70 and 80 percent during the first two months of 2022. As cases and restrictions have dropped, the recovery rate has remained near or above 85 percent, topping 90 percent on multiple days. These figures are incredibly encouraging for the hotel sector because the late spring and summer months are busy for leisure travel, especially with expectations to see pent-up demand this year. 

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Leisure travel accounted for 80 percent of all domestic flights in the U.S. in 2019, according to the U.S. Travel Association. High travel recovery rates in the first half of 2022 indicate that, while quite slow to pick up through much of last year, business travel has also contributed to the healthy and sustained rebound in traveler numbers. However, it may be a long time before business travel rebounds to its 2019 levels — the last “normal” year — because teleconferencing platforms have provided flexibility and have served as a cost-saver for firms. Travel considerations have direct implications on the hospitality sector because those who are traveling, whether for business or leisure, drive demand for temporary accommodations.

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Labor is such a crucial component of the conversation around performance in the hotel sector, both in terms of the people who keep hotels going by working at the properties as well as business activities that spur stays at hotels. Total non-farm payroll employment was strong in February, growing by 678,000, according to the Bureau of Labor Statistics — a stronger number than expected, after months of tepid growth that fell short of consensus forecasts. Leisure and hospitality employment and professional and business services led the way — both good signs for the hotel sector, which gained 28,000 jobs in February. This indicates that demand for hotel properties is increasing, as hotels are hiring after employment in the sector was decimated at the start of 2020.

Hotel performance has varied tremendously by asset tier and has not been immune to variant concerns. Revenue per available room (RevPAR) at luxury properties has remained above its counterparts since mid-2020 and is expected to do so for the forecast period. More interestingly, while RevPAR fell sharply again in the second half of 2021 for the lower tier, which corresponded to the rise of the delta and omicron variants, upper tier assets managed to maintain their gains in 2021, with minimal impact on RevPAR.

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Occupancy, however, tells a different story. While upper tier properties typically have the highest occupancy rates, they are also the most severely affected by downturns in demand. This is likely because upper tier hotels simply do not have the margins to lower average daily rates to bolster occupancy, since they face much higher expense ratios (upwards of 75 percent) than their limited- or select-service lower tier counterparts (approximately 65 percent or less).

Looking to the future of the sector, Moody’s Analytics CRE predicts that in 2022 and 2023, RevPAR for the upper tier is expected to grow at a faster rate than that of lower tier properties. For the upper tier, RevPAR recovered to just shy of $100, a threshold it is expected to cross in the second quarter of 2022 as the busy summer travel season gets underway. Similarly, across all tiers, occupancy is expected to grow steadily in 2022 and into 2023, before leveling off and remaining stable after the recovery growth period.

Ermengarde Jabir, Ph.D.

Economist with Moody's Analytics Reis.

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