Hospitality Investing News - Southeast November 2024

According to Jan Freitag, the National Director for Hospitality Market Analytics at CoStar, the company that owns STR, the third quarter of 2024 set new quarterly records in both hotel room revenue, at around $56 billion, and room nights available, at around 521 million room nights. However, across the board, room demand was essentially flat from a year ago. ADR increased, below the inflationary rate, at 1.4%, a pace that has declined for the lasts straight four quarters. Even with a continued lack of new hotel developments and softening ADRs, occupancy still dropped 0.5%. A meager decline, but a decline, nonetheless. Ultimately, RevPAR grew at the second lowest rate since 2021 at 0.9%, second to the first quarter of 2024’s growth of 0.1%.
While the fed cutting interest rates in September and giving a verbal nod to future rate cuts, albeit at a slower pace, is a big sigh of relief for the investment markets, as Jamie Dimon, CEO of JPMorgan Chase, said there are still fundamentals of an economy that appear to be operating independently of what the Fed does with interest rates, or the results of the election.  There might not be better example of this than the continued “bifurcation” story the hotel industry keeps hearing, ad nauseum, between higher-end hotel and lower-end hotel performance.

When diving into the data, room demand for luxury hotels grew by 3.1% and economy hotel room demand shrunk by 2.4%. Urban areas, which are usually the epicenters of the highest end hotels, saw RevPAR increase by 2% and ADRs increase by 2.6%. Nearly double the third quarter average for all hotels.
What does this mean for the hotel industry? What we are most likely seeing is the industry stabilize back to the fundamentals of travel and tourism after a few years of good and bad anomaly performances. Meaning, the fourth quarter will probably continue to reflect anemic growth for hotels outside the upper end of the chain scale. More than likely, the top 25, 50, or even 100 markets will, short-term, continue to capitalize on corporate, and group demand. Long-term, where applicable, will even see leisure demand as it eventually will begin to recover. Economy and lower-end hotels should see gains as well, however, most likely not at the levels we saw after COVID. Probably somewhere between 2022 and 2023, and in some cases – even 2019. However, economy and midscale hotels, uniquely have a new challenge, rising costs. And not just the usual, labor, breakfast, and supplies, but also insurance and property taxes are taking a toll on returns. Previously, this would be reflected in heightened ADRs to counterbalance these expenses, however, data is showing heightened ADRs are resulting in decreased occupancies. While all hotels are faced with increased cost of operations, economy and midscale hotels haven’t really seen how the market is going to be effected by the new premium economy and midscale brands coming out, or when the development pipeline picks up as the Fed lowers interest rates.