NEW YORK — The strength of U.S. Hotel demand this year has renewed hoteliers’ optimism for a faster recovery, which appears likely according to industry forecasters, with some caveats.

During the “Statistically Speaking” session of the NYU International Hospitality Industry Investment Conference, Amanda Hite, president of STR, CoStar’s hospitality analytics firm, said U.S. hotel occupancy rebounded strongly in 2021, with July contributing most of the growth with steady gains in the other months. Average daily rate followed a similar pattern, and revenue per available room on a nominal basis has returned to where the industry was in 2013. On an inflation-adjusted basis, RevPAR is about 25% below its prior peak in 2018.

Rate growth has been significantly stronger than STR projected previously, prompting the firm to revise its forecast for ADR. The new forecast accounts for the recent rapid movement of inflation, which is the highest its been since the 1990s, as well as the expectation that inflation will slow in upcoming financial quarters, Hite said.

She said leisure demand continues to drive the industry's recovery, but that growth rate is expected to slow, and group and business travel are expected to rebound more significantly in 2022.

“We’ve already started to see signs of life, really positive momentum this fall, and we expect that will continue to pick up in 2022,” she said.

STR moved its projection for full recovery of U.S. hotel industry RevPAR up to 2023. On a real basis that factors in inflation, ADR and RevPAR are not expected to reach 2019 levels until 2025.

“2022 is going to be a very positive year,” she said. “I’ve said multiple times, with today’s reopening of international travel, we have every piece of the demand segment now that we need to put the pieces of the puzzle back together for a full recovery.”

Demand Recovery

Hotel demand has been the most important metric for STR in measuring the recovery throughout 2021, Hite said.

“What’s been really nice to see over the past couple of months is a return to normal seasonal patterns,” she said, citing a slide in occupancy at the end of summer when students went back to school.

Strong weekend demand, which has reached 2019 levels, is evidence that leisure travel has fueled the rebound. Weekday demand still is lagging 2019 levels, but has improved from September to October, a sign that group meeting business and business travel is returning.

Rates also have been stronger than expected, Hite said. Over the past four months, nominal ADR has exceeded 2019 levels. Accounting for inflation, U.S. hotel rates were just below 2019 levels, except for July when rates surpassed 2019.

For the past five months, U.S. hotel RevPAR has been in the "recovery" zone, which STR defines as achieving between 80% and 100% of 2019 levels. The economy and midscale segments have the most hotels with inflation-adjusted RevPAR above 2019. Across the U.S., 46% of hotels that share data with STR reported RevPAR higher than 2019 levels, she said.

The upper-midscale and upscale segments have the most hotels with 60% or more occupancy, Hite said. Almost half of upper-upscale hotels in the U.S. are reporting occupancies of 60% or more, which is encouraging because that segment has struggled more through the pandemic, she said.

The rebound in hotel demand has been more robust in the U.S. than in other parts of the world, in part due to less severe COVID-19 restrictions and fewer lockdowns, said Rod Clough, president of the Americas at HVS.

“We were able to get back and get out and start traveling a lot easier than some of our international counterparts,” he said.

Data also shows that guests in the U.S. are booking longer hotel stays — from an average of 1.2 nights to 1.7 nights per stay.

Hotel Valuations

Limited-service hotel valuations have exceeded averages, which was unexpected, Clough said. Full-service hotel valuations also have increased but are more volatile.

“The transactions happening this year were the ones that everyone wanted,” he said, explaining that the more problematic assets and sales yet to come will cause valuations to drop.

Much of the transactions activity is centered on the limited-service hotel segment, where a good hotel brought to market will get 10 to 15 offers, and that competition will drive cap rates down, he said.

In a recent HVS survey, brokers indicated capitalization rates on favorable assets have stabilized and are expected to exceed 2019 rates over the next 12 months.

The survey reported limited-service hotels have a cap rate of 8.6%, select-service hotels have a rate of 8.1%, full-service hotels are at 8%, and luxury and upper-upscale hotels are at 6.7%.

While full-service and luxury hotel cap rates are about where they should be, the limited-service hotel cap rate is about 1.5 points lower than normal and the select-service rate is about a point below normal, Clough said.

“We’re seeing kind of record-low cap rates right now for those types of assets not surprisingly” he said. “But, over time, we would expect those rates to increase.”

A year ago, cap rates were about the same for limited-service hotels, but were about a point higher for select-service, full-service and luxury hotels, he said.

Limited-service and select-service hotels are trading above 2019 values, based on forward-looking 12-month statements that show net operating income that’s more favorable to 2019, Clough said.

“There’s so much competition and frothiness in the market, so our values on the limited-service side on average have already recovered,” he said.

Full-service hotel values will take longer to recover, due to greater cost pressures and lagging RevPAR in that segment, he said. Some properties could rebound by the fall of 2023, while others will not recover until 2025 due to being more focused on convention business or other segments that are lagging.

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