Hotel prices that are historically high — in this economy?
Prepare yourself, people.
Because discounted rates wouldn't encourage customers to plan a stay during a health emergency and lockdown, hotel businesses encouraged hotel owners to maintain rates at generally regular levels during the pandemic. This made it possible for hotel businesses to recover from pandemic lows far faster than they ever had before.
But with the economy in such a precarious position right now, surely the tried-and-true strategy of lowered prices is being taken into consideration?
Wrong.
Interest rates have recently increased by 0.25% as part of the Federal Reserve's attempts to combat inflation.
Due to this, borrowing money to construct things like hotels and real estate developments is more expensive.
Even under ideal conditions, building hotels in the United States is a difficult operation due to high labor and material expenses, as well as supply chain problems that have caused several projects to be delayed.
Less fresh supply enters the market whenever there is a construction headwind.
Higher hotel rates are likely to endure as a result of a declining supply coupled with rising demand factors like international and business travel.
For example, the Las Vegas Review-Journal reported that this month saw the suspension of building on Dream Las Vegas, a project that is a part of Hyatt's recently purchased Dream Hotel Group business. The hotel's developer attributed some of the construction hold-up to increased loan rates.
This scenario could become worse if there are more occurrences of it.
Rates will only increase as fewer hotel rooms enter the market in the face of recovering demand levels.
"We continue to feel extremely optimistic about things from a fundamentals of the industry point of view. On the company's fourth-quarter results call last month, Hilton CEO Christopher Nassetta noted that what ultimately determines hotel price are the fundamentals of supply and demand.
The supply side is very subdued. The level of supply we are currently witnessing is the lowest we have ever seen, to use the example of the U.S. market, which is our biggest market.
Even though the economy is in bad shape due to waves of layoffs in the tech sector, a banking crisis, and concerns about inflation, the hospitality business is nevertheless doing well.
In addition to being a major contributor to the recent better-than-expected job figures, the hospitality industry also posted enormous 2022 profits during the most recent earnings season.
Large hotel CEOs appeared to be in awe of the capacity to charge greater prices, and it doesn't appear that the trend is slowing down despite market uncertainty.
According to STR statistics, luxury hotels in the United States performed more than 24% better than expected last week. U.S. hotel performance as a whole was 10.4% better than in 2019.
The case of the vanishing hotel rooms
There won't be any immediate relief in the form of new hotels opening.
According to Daniel Lower, CEO of LW Hospitality Advisors, "new hotel supply has been quite limited on a relative basis even before increased lending rates and the banking crisis."
"Now, eight to nine months later, it will be difficult to acquire finance, even for operational hotels that are profitable, due to rising interest rates and the banking crisis. Obtaining construction financing for a new project will be more difficult.
Although there have been some indications that hotel building has started to gradually increase this year, the total number of hotel rooms in the United States that are now under construction has not returned to pre-pandemic levels.
Hotel firms may highlight growth, but conversions—agreements in which an existing hotel owner agrees to rebrand their establishment—help to some extent. Typically, a market doesn't gain more hotel rooms as a result.
In some cases, it even requires fewer rooms.
Moreover, a sizable portion of hotel rooms completely disappeared from the system during the pandemic as many owners converted their properties into other uses. This includes both modest hotels that are turned into residences and major hotels, like the Hotel Pennsylvania in New York City, that are demolished to make way for brand-new real estate developments.
As for older, visually and operationally outmoded hotel items, Lesser noted, "we're still seeing a fair number of them being transformed either to different usage or destroyed for new development." The CEOs are correct in stating that new supply is currently muted and will remain muted, which will only increase the strain on pricing power.
Are there any signs of relief?
Rome and hotels were not constructed overnight. Travelers must eventually experience some sort of relief. After all, the demand for leisure travel is still high, and the corporate, group, and international travel industries are recovering. In order to accommodate the need for extra rooms, developers are typically encouraged to continue through with new hotel developments.
Although hotel operators may claim to minor increases in their individual sizes over the past year, this is probably not enough to stop the rise in room fees, especially at higher-end hotels.
Patrick Scholes, managing director of accommodation and leisure equity research at Truist Securities, declared that there was "certainly not a surplus of new supply."
"There are undoubtedly some cities [like Nashville and New York] with a lot of new supply. But generally speaking, there is hardly any new supply.
Your midscale brands, many of which are those of Hilton or Marriott, or even Wyndham's new Echo brand, will be where you do see supply.
Although high loan rates may eventually reduce inflation, they don't make it easy to negotiate hotel deals or start digging.
Few transactions took place, and according to a Bloomberg report from MIPIM, the annual conference for the global commercial real estate sector held earlier this month in Cannes, France, "transaction volumes for European real estate have fallen off a cliff as investors have struggled to underwrite deals in the face of an uncertain outlook on rates."
The purchase of a Pullman hotel in Cannes was one of the few deals revealed during the conference, but that's an existing asset and not exactly an indication of new construction bringing more European hotel supply and bringing rates down for your summer holiday.
Recently, the leaders of the Federal Reserve and the European Central Bank have stated that bringing down inflation is their top goal.
Their primary instrument for doing this is an increase in interest rates.
The strain in the tourism industry will persist if commercial real estate is kept in a condition of paralysis by excessive borrowing rates:
There are still a lot of individuals who want to stay in hotels, but developers lack the resources to increase the supply to match this demand.
It will continue to be a situation where it's fantastic to own a hotel but not so great to be the one paying the nightly charge until that changes.
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