NEW YORK—The NYU School of Professional Studies Jonathan M. Tisch Center of Hospitality and Boston Consulting Group (BCG) collaborated on a survey of hotel owners, management companies, and other industry stakeholders to gauge their sentiments and prospects for the hospitality industry.
The resulting white paper, titled “Hotel Borrowing Costs are Rising—But So Are Occupancy Rates,” projects positive outcomes based upon rising demand that will bolster industry metrics, such as occupancy rates, average daily room rates (ADRs), and revenue per available room (RevPAR), while new construction is down to 2015 levels.
For the past three years, the Tisch Center of Hospitality and BCG have collaborated on research on the latest industry challenges and opportunities.
“We expect this year’s report will arm industry stakeholders with valuable information to help move their businesses forward,” said Sean Hennessey, associate professor at the NYU SPS Tisch Center of Hospitality and contributor to the white paper. “While inflation increases operating costs, it can also help accelerate room rate growth. Further, interest rates rise in an inflationary environment, which affects the feasibility of new construction. On balance, the profitability outlook is attractive,” added Hennessey about the survey findings.
“Uncertainty, inflationary fears, and elevated interest rates will likely be with us for a while,” said Tom McCaleb, managing director and partner at BCG. “All can have a chilling effect on hospitality investment. Despite these concerns, our latest work with the Tisch Center shows that strong room demand will keep the hospitality industry an attractive investment for the foreseeable future.”
While the NYU SPS/BCG analysis is far from gloom and doom for the hospitality industry, the following are a few top-line results from the survey.
Guest Demand: A Major Source of Optimism
- More than 70 percent of survey respondents anticipate demand will at least somewhat increase by the end of 2023, and 42 percent expect significant increases in 2024.
- Hoteliers are looking for nominal revenue increases of 4.6 percent to 5.1 percent in 2023. Those expecting a significant increase in demand anticipate revenues to rise by about 12 percent.
- Real growth rates seem likely to exceed the rate of inflation. The revenue increases will be driven by both volume and price.
- Hoteliers expect room rates to rise by 8.3 percent to 8. percent over the next 18 months, expanding gross margins by about six percentage points.
Interest Rates: The Biggest Threat for Investors
- Even though hotel industry participants expect the inflation rate to drop below 5 percent by the end of 2024, they are nonetheless wary.
- High-interest rates scare investors in hotels as in other commercial property sectors. In the current environment, 82 percent of hotel owners view the hotel industry as less attractive than other investment classes.
- The industry is approaching a trigger point. A summary of recent hotel financings shows spreads topping out at 400 basis points above the secured overnight financing rate (SOFR), which itself is approaching 5 percent when borrowing costs exceed 8 percent.
- In this survey, 89 percent of hoteliers consider rates above 8 percent unacceptable for taking out a loan.
Persistent Labor Challenges Add to Investor Reticence
- Prolonged staffing shortages add to investor concerns; 70 percent of hotel owners view the hotel industry as less attractive if labor problems persist.
- More than 60 percent of respondents reported that they are somewhat or severely short-staffed, which NYU SPS/BCG estimate costs hoteliers about seven percentage points of revenue and two points of operating margin.
- More than 75 percent of respondents experienced modest or better labor productivity gains in the last three years and are optimistic about improving employment going forward. More than 60 percent expect continued improvements in 2023, and 100% expect significant improvements in 2024.
- Two challenges still need to be solved in this area: the number of job openings and decreases in real earning potential for industry workers.
Find more of LODGING’s 2023 NYU International Hospitality Industry Investment Conference coverage here.
