2023 End of Year Hospitality Market Report
Hospitality Market Overview
After effectively recovering from the disruptions triggered by the COVID-19 pandemic, such as travel suspensions and hotel reservation halts, the U.S. commercial real estate hospitality market has experienced a strong revival in its fundamentals. Despite facing challenges like workforce shortages, rising wage rates, interest rate hikes, and a decrease in deal flow in 2023, optimistic signs point toward growth and investment opportunities in 2024, and RevPAR is anticipated to increase by 4.1%, while ADR growth is expected to rise by 3.1%.
U.S. Hospitality Market Performance
By The Numbers | Last 12 Months | Source: CoStar Group
- Occupancy: 63.1%
- ADR: $155.42
- RevPAR: $97.99
According to CoStar Group, 2023 RevPAR growth increased 4.9% driven by average GDP growth and robust inflation. Strong return of group travelers, even topping 2019 results in some months, propelled Upscale hotel performance and the expectation is for more meeting and convention travel in 2024.
The hospitality market is expected to benefit from limited new supply in the upcoming quarters. The typical U.S. long-term average for supply growth hovers around 2%. The number of rooms under construction has declined from a pre-pandemic peak of approximately 212,000 rooms to about 152,000 rooms. This is a 5% drop YOY and points to the continued difficulty in securing construction financing. As interest rates stay elevated, this trend is likely to persist.
Beyond the pipeline, transaction activity is being influenced by higher interest rates. In 2023, hospitality sales volume was down 47% YOY, totaling 26.2 billion, according to RCA. In such conditions, market participants find it challenging to muster the confidence to engage in transactions.
Unveiling the Construction Landscape
The majority of under-construction rooms are distributed in three regions, namely the Pacific (California, Oregon, Washington, Alaska, and Hawaii), Mountain (Montana, Idaho, Wyoming, Colorado, Utah, and New Mexico), and South Atlantic (Maryland, Delaware, West Virginia, Virginia, North Carolina, South Carolina, Georgia, Florida), collectively contributing to over 50% of the total room count under construction. California and Florida attract developers, benefiting from sizable populations and being perennial favorites for both leisure and business travelers. In the Mountain region, Las Vegas, Nevada, stands out with only eight hotels in construction, but these represent around 4,800 rooms. Among the locations with the most significant in-construction pipelines, New York City leads with over 8,000 rooms, surpassing even Las Vegas.
Travel & Industry Updates
Tourism rates have risen in tandem with restrictions on short-term rentals and a tightening construction pipeline, resulting in elevated tourism rates in major urban centers within the top 25 U.S. markets. The rapid recovery is attributed to considerable pentup demand for both business and leisure travel. However, a complete travel recovery is not expected until 2025, as escalating costs have impeded budgets.
Leisure travel faced a downturn in Q2 and Q3 of 2023; pandemic-related savings diminished, and rising costs impacted travel budgets. Nevertheless, there is a continuing trend in “Bleisure Travel,” where business travelers extend their trips to enjoy leisure activities. Employees are structuring their travel plans around work and leisure, contributing to the industry’s recovery.
Takeaways
In conclusion, the hospitality market has effectively recovered from the disruptions caused by the COVID-19 pandemic despite grappling with the challenges presented in 2023. The upswing in ADR contributed to a sustained increase in RevPAR, bolstering overall gross revenues. For CRE investors prospecting individual hospitality assets, a transaction’s success will be contingent on operating fundamentals, capitalization, and market alignment factors.
