Hotels

Operators facing lower revenue growth, higher costs

The U.S. hotel industry’s key performance indicators have consistently exceeded 2019 levels since March 2022, largely because of higher rates; however, overall hotel demand is still down versus pre-pandemic levels. Leisure travel and, more recently, group and inbound international travel have led the recovery, while transient business travel has lagged. As the industry recovers, hotel owners have been faced with labor shortages and higher-than-average wage growth.

Figure 20: Relationship between GDP & RevPAR Growth, 1988-2019

Sources: CBRE Hotels Research, CBRE Econometric Advisors, CoStar.

Using CBRE’s forecast of a 0.2% decline in GDP in 2023 and an unemployment rate of 4.4%, history suggests RevPAR growth will slow dramatically to just 5.8% next year from 29% in 2022. However, should 2023 GDP follow CBRE’s downside scenario of 2.4% contraction, year-over-year RevPAR could decline by as much as 4.1% in 2023. Nevertheless, certain locations, chain scales and property types could provide opportunities for relative outperformance in the coming year.

Figure 21: RevPAR Performance by Hotel Chain Scale & Location During Past Economic Downturns

Sources: CBRE Hotels Research, CoStar.

Upscale and upper-midscale chain hotels will fare better

On average during economic downturns, RevPAR in the upscale and upper-midscale chain scales falls less and recovers more quickly than the overall industry as guests trade down. We expect that this will be the case in 2023.

Since 1987, drive-to leisure destinations have outperformed central business district locations in RevPAR growth during recessionary periods. This was also true since the onset of COVID-19. In 2023, we expect leisure destinations to continue outperforming core urban assets, with high-barrier-to-entry leisure destinations like Charleston, Napa Valley and Sedona potentially generating higher RevPAR growth than urban CBD locations. Certain West Coast cities like San Francisco, Los Angeles and Seattle could be the exception if China fully reopen its borders.

Higher wages and operating costs will pressure owners

As higher wages and operating costs outpace RevPAR growth, we expect the margin pressures that most hotel operators experienced in 2022 will continue in 2023. Limited-service properties will fare better as they provide less amenities and need fewer employees than other hotel classes. Historically, limited-service properties experienced a 220-bp contraction in margins during recessions, compared with 300 bps for full-service properties.

Figure 22: 2023 Hotel Outlook

* Based on Q3 2022 Estimates.
** Based on Q2 2022 Estimates.
Sources: CBRE Hotels Research, CBRE Econometric Advisors, Kalibri Labs.

Investment activity likely will remain subdued

The combined impact of decelerating revenue growth, margin compression and rising financing costs could mean investment volume, which declined by roughly 18% year-over-year in Q3 2022, may not recover in 2023. However, there are some opportunities in drive-to leisure markets, West Coast markets that would benefit from the lifting of travel restrictions from Asia, upscale assets that are trade-down beneficiaries and select service properties that have lower staffing levels. Markets with minimal supply growth, high barriers to entry for new supply and recently renovated assets with strong brand recognition should also fare better.