The state of the union for US hotels? Hard to predict.

Rothman said that such strong economic indicators like the third-quarter GDP increasing by 4.9% would normally mean a boon for hotels. But that’s not been the case, as hotel numbers have been softening in the back half of 2023.

The reasons are plentiful and well cited, from international inbound still not back to pre-pandemic levels to the proliferation of glamping and a full recovery of cruise demand.

“That’s something that surprised me, personally, is how strong the economy was and yet, how soft hotels were in the third quarter,” Rothman said. 

Dallas-based CBRE recently published its U.S. Hotel State of the Union report. Hotel Investment Today talked to Rothman about the main findings of the report, the biggest surprises and the impact of short-term rentals on hotels.

Performance down, profits up

The report found that October RevPAR for hotels declined 2.1%, driven by a 3.2% decline in occupancy and partially offset by a 1.1% increase in ADR. The RevPAR performance was also weighed down by independent hotel performance.

It also found that despite the expectation for continued GOP margin pressures, flat margins in September and a 3.4% increase in total revenues led to GOP profit dollars. 

 “The biggest surprise was that September showed gross operating profit dollar growth. And it was a month in which margins were flat year-over-year,” she said. “They’ve been contracting, essentially, since very early in the first quarter. To me, that was the biggest directional change.”

Short-term rental pressure

The report also found that while hotel demand growth declined 2.4% in October, short-term rental demand (think Airbnb or Vrbo) rose by 15%. That suggests that short-term rentals are taking share from hotels.

Consumers are really strong; they are spending, and they are spending on travel. They’re just not spending in a traditional hotel to the same extent as before the pandemic, at least on the demand side. Rates are higher, but in terms of occupancy and demand, we have yet to see a full recovery.

Rachael Rothman

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“Consumers are really strong; they are spending, and they are spending on travel,” Rothman said. “They’re just not spending in a traditional hotel to the same extent as before the pandemic, at least on the demand side. Rates are higher, but in terms of occupancy and demand, we have yet to see a full recovery.”

The CBRE report said that while ADR and RevPAR have already recovered to pre-pandemic levels, occupancy has not. The forecast is for occupancy to recover by 2028 and that urban RevPAR will grow faster than other locations over the next few years (+5.2% RevPAR CAGR, higher than the average of +3.4%.)

Rothman said New York has been the biggest standout among the urban markets.

“People have really been surprised by the strength and the speed of the recovery in New York and the number of compression nights,” she said.

The report found that the pace of loan origination for hotels was down again in October as interest rates continued to rise. Rothman said the Fed’s recent announcements of rate cuts in 2024 mean many investors are taking a wait-and-see attitude toward lending.

“If you don’t have to refinance now, you’re probably holding off,” she said. “If people feel that there’s the possibility that we’ll have lower rates six months from now, and they have the runway… they’re going to wait it out unless there’s a transaction or a refi date that they need to adhere to.”

When will inbound return?

The report finds that the gap between inbound and outbound travel (especially from China) persists but has narrowed from 38% a year ago to 27.7% in October.

Rothman said there is reason for optimism for a return (and for continued growth for hotels), but at a much slower pace than anyone predicted.

“It takes a long time to add back long-haul flights. I guess I was optimistic that a year might be long enough. But those expectations probably need to be right-sized for another two years to recover fully.

“You do see it improving. It’s just maybe not as fast as we had liked or wanted. But if you’re not seeing it roll over, you’re not seeing declines. It is steadily improving over time. And I think that gives people cause for optimism.”