USA National Hospitality Market Report as of October 1, 2023

[Manuel Angeles]

Greetings,

Here is an update on the current National Commercial Hospitality Real Estate Market in The United States of America:

Growth in U.S. performance metrics has slowed sharply over the last five months. This could point either at the beginning of a prolonged, slow downturn or could just be part of the ongoing normalization trend playing out across the industry. Room demand growth has been flat or declined since April which in turn led to occupancy declines. New supply is not a severe headwind and has only grown sub-0.5% for a while now. This softens the blow of demand declines, but still gives operators little pricing power conviction. Inflation continues to assist revenue managers as they lift ADR, but prices have increased sub-4% since April. RevPAR growth followed and in 2023Q3 it grew by -1.9%, which can also be considered to be more “normal”.

Looking ahead, CoStar and Oxford Economics project a mild recession with a 1% GDP decline in 23Q4 and 24Q1. Nonetheless, the U.S. RevPAR forecast for 2023 shows, for the first time, positive growth in a recession. Why is this time different? There are a few reasons for muted optimism: Corporate group and transient demand are still growing, although it will still take time to reach 2019 results. The ability to work from almost anywhere but the office on Fridays could spur long weekend trips more often. We expect that "higher for longer" inflation allows rates to inch upward, driving up RevPAR.

But headwinds for certain segments remain. Office utilization may be structurally impaired so it is possible that - despite improvements - midweek transient travel will stay below 2019 levels, as well. On the Delta Airlines 23Q1 earnings call, its president stated their expectation for corporate demand to be at 75% of pre-pandemic levels, and on their 23Q2 call he simply said: “We're not really counting on anything more than what we see today." In addition, Kastle System office occupancy data show office utilization in downtown areas still down around 50% from pre-pandemic levels.

The number of rooms in construction dropped from a pre-pandemic high of around 212,000 rooms to just around 150,000 rooms. But construction debt costs are rising and this will likely have an impact on construction counts going forward.

In addition to the pipeline, transaction activity is also impacted by higher interest rates. The preliminary third quarter transaction volume was around 45% lower than in 22Q3. Higher interest rates and a looming recession are putting a damper on deal appetite which will likely last through the first half of the next year. Mezzanine and other debt options are available, for a price, and the higher interest payments, together with looming capital requirements from the brands, so-called property improvement plans, or PIPs, may push some owners to sell.

Here are several graphs illustrating the current national commercial hospitality market in The United States of America:

Here is the full USA hospitality market report for you to review: https://d2saw6je89goi1.cloudfront.net/uploads/digital_asset/file/1170836/United_States-Hospitality-National-2023-10-02_compressed.pdf

Data includes: Sale price per key distribution, cap rate distribution, cumulative sales volume by year, months to sale, recent significant sales, occupancy rates, ADR, RevPAR, construction deliveries/demolitions, economy, job growth. population growth, and Los Angeles county sub-market activity.