The hotel industry looks set to experience impressive growth this year, fueled by several key factors and defying recession fears.

Key Drivers for Hotel Industry Growth in 2023

Multiple factors drive the hotel industry's growth in 2023, including rising RevPAR, positive GDP correlations, eased travel restrictions, and strong business travel performance. Each of these components has a unique impact on the industry's expansion, contributing to a thriving and resilient hospitality sector.

Rising Revenue per Available Room (RevPAR) Forecasts

A recent report from CBRE indicates a bright future for RevPAR growth in 2023, with the strongest gains expected in Q1. These positive predictions are backed by findings from Ernst & Young, which show that RevPAR has exceeded GDP growth during the current economic cycle, suggesting a good year for the hospitality sector. Furthermore, the US and European markets have demonstrated impressive growth rates, with RevPAR increasing by 8.1% and 6.1%, respectively, from 2019 to 2022.

Positive GDP Growth and its Correlation with Hotel Performance

Historically, there has been a strong correlation between GDP growth and RevPAR. Despite potential recession fears, experts believe that the travel industry will still perform strongly in 2023, thanks to the ongoing, post-pandemic urge to travel and a robust market performance in the hospitality sector. Additionally, the industry's average daily rate (ADR) has seen significant increases in the US and Europe compared to 2019 figures, reinforcing the positive outlook for hotel performance.

Easing of Travel Restrictions and International Travel

As travel restrictions continue to ease, international travel is set to surge. The lifting of COVID-19 travel restrictions in China at the start of 2023 is particularly significant, as China was the world's largest outbound travel market before the pandemic, with Chinese travelers taking 154 million trips and spending $255 billion. 

This development is expected to have a measurable impact on both the domestic and international hospitality industries. Furthermore, the easing of restrictions will also benefit other regions, boosting global travel demand and hotel occupancy rates.

Strong Performance in Group and Independent Business Travel

Business travel is poised for recovery as companies ramp up their travel budgets, and trade shows and conferences are selling out, reflecting the pent-up demand still present across all industries to get out of the office. 

Another factor in the industry’s resurgence is the growing work-from-home segment of the workforce. Though this may be a major headwind for the office sector, employees building their travel plans around both business and leisure fuels the trend of "bleisure" travel, which ultimately results in more revenue and continued economic recovery for the hospitality sector.

Moreover, the rise of the digital nomad has been a significant contributor to business travel, as more companies adopt hybrid remote/office work environments. As a result, professionals are increasingly mobile, working from locations they wish to visit, and driving further demand for hotels catering to business travelers.

Q4 2022: A Promising Foundation for 2023

The strong performance of the hotel industry in Q4 2022 set the stage for a promising 2023, with record U.S. RevPAR growth and several factors contributing to its strength in the final quarter of the year.

Record U.S. RevPAR Growth in Q4 2022

In the last quarter of 2022, the U.S. hotel industry experienced record-breaking RevPAR growth. This exceptional performance was attributed to a combination of increasing domestic travel, a resurgence in international tourism, and the return of business and group travel. The strong foundation laid by this growth in the fourth quarter of 2022 has created a positive outlook for the industry this year.

Factors Contributing to Strength in the Quarter

Several factors contributed to the hotel industry's impressive performance in Q4 2022. One major contributor was the easing of travel restrictions, which led to a surge in international travel demand. 

Additionally, the continued recovery of business travel, driven by the growing trend of "bleisure" trips and the rise of digital nomads, provided a significant boost to the industry. 

Finally, the holiday season and an increase in leisure travel during this period played a role in driving RevPAR growth during the quarter.

Anticipated RevPAR Growth in 2023

Building on the momentum from the fourth quarter, the hotel industry is expected to continue experiencing RevPAR growth throughout 2023.

Strongest Growth Expected in Q1 2023

CBRE's report anticipated the highest RevPAR growth would be in the first quarter this year, driven by several factors, including the post-holiday travel demand and the beginning of the conference and trade show season.

Though the book is closed on the first quarter, the numbers aren’t yet widely available. However, the sector undoubtedly performed well, which sets the tone for the rest of the year.

Steady Growth Throughout the Year

Beyond the first quarter, steady RevPAR growth is expected to continue throughout the year, supported by various factors, such as the sustained demand for leisure and business travel, the easing of international travel restrictions, and ongoing investments in the hospitality sector. 

This consistent growth will further demonstrate the hotel industry's ability to adapt and thrive in a rapidly changing global economic landscape, solidifying its position as a key driver of economic recovery.

Inflation and Its Mixed Impact on the Hotel Industry

Inflation has emerged as a prominent factor affecting the global economy and, subsequently, the hotel industry. While it may have a mixed impact, it is essential to consider its effects on top-line growth, margin pressures, and the increased cost of renovations and development.

Top-Line Growth and Margin Pressures

On one hand, inflation can drive top-line growth in the hotel industry, as it leads to increased room rates and overall revenue. However, it can also put pressure on profit margins, as rising costs of labor, goods, and services impact hotel operations. 

Hotels may need to adapt to these challenges by streamlining operations, improving efficiency, and utilizing technology to optimize resources and minimize the effects of inflation.

Increased Cost of Renovations and Development

Inflation can also significantly impact the cost of renovations and new hotel developments.

As the prices of construction materials, labor, and other expenses rise, hoteliers may face difficult decisions about whether to delay or scale back planned renovations and developments. This may result in a slower pace of growth for the industry, but it could also create opportunities for existing hotels to capitalize on limited new supply.

Slower Hotel Supply Growth and Its Benefits for Existing Hotels

The hotel industry is expected to experience slower supply growth in the coming years due to a combination of factors, including inflation and economic uncertainty. This slowdown can be advantageous for existing hotels, as it may lead to strengthening pricing power and more.

Forecasted Supply Growth for the Next Five Years

According to the CBRE report, hotel supply growth is forecasted to be relatively slow over the next five years. 

This is due to a variety of factors, including the rising costs of development, tightening lending standards, and a more cautious approach to new projects amid economic uncertainty. This slower growth in supply could provide an opportunity for existing hotels to capture a larger share of the market.

Strengthening Pricing Power for Existing Hotels

As supply growth slows, existing hotels may benefit from increased pricing power. With fewer new hotels entering the market, competition may ease, allowing hotels to raise room rates and improve their RevPAR. This could lead to higher profitability for existing hotels, even in the face of inflationary pressures and economic challenges.

Factors Contributing to Optimism in the Hospitality Sector

Despite the potential challenges posed by inflation and slower supply growth, several factors contribute to optimism within the hospitality sector, including strong leisure demand and group business travel, as well as the recovery of business travel and the rise of the digital nomad.

Leisure Demand and Group Business Travel

The continued strength of leisure demand and group business travel is a key driver of optimism in the hotel industry. As consumers prioritize experiences and travel, the demand for hotel stays is expected to remain robust. 

Additionally, group business travel, such as conferences and trade shows, is also on the rise, signaling a return to pre-pandemic levels of activity and further bolstering the industry's outlook.

Business Travel Recovery and Rise of the Digital Nomad

Another factor contributing to a positive outlook for the hotel industry is the recovery of business travel and the emergence of the digital nomad trend. As companies gradually increase their travel budgets and employees embrace remote work, the demand for hotel stays for business purposes is expected to grow. The rise of digital nomads, who blend work and travel, further supports this demand, creating new opportunities for the hospitality sector to cater to this growing segment of travelers.

Transaction Market Outlook and Importance of Due Diligence

The transaction market for the hotel industry is expected to face some challenges in the near term, with anticipated slowdowns in transaction activity and a heightened importance of due diligence in navigating the market.

Anticipated Slowdown in Transaction Activity

The hotel transaction market is expected to experience a slowdown in 2023, primarily due to rising interest rates and inflation concerns. This could make borrowing more expensive and result in more cautious investment behavior among hotel buyers and sellers. 

Despite the slowdown, there will still be opportunities for value creation and growth through mergers and acquisitions in the hospitality sector, particularly for well-prepared investors.

Importance of Due Diligence in a Challenging Market

In a challenging transaction market, due diligence becomes even more critical for identifying the right opportunities and mitigating risks. Investors and hotel operators must carefully assess potential deals, examining factors such as market conditions, property performance, and future growth prospects. 

By conducting thorough due diligence, industry players can ensure they are prepared to seize the right opportunities as they arise.

Workforce Changes and Boomerang Workers in the Hospitality Industry

The hospitality industry has experienced significant workforce changes due to the pandemic, with job losses followed by recovery, and the potential for "boomerang workers" returning from other industries, such as tech.

Job Loss and Recovery in the Hospitality Sector

The hotel industry was severely impacted by the pandemic, resulting in widespread job losses as travel restrictions forced hotels to reduce staffing levels. However, as the industry rebounds and travel demand increases, hotels are gradually rebuilding their workforce. This recovery presents an opportunity for the industry to attract new talent and rehire former employees who may have transitioned to other sectors during the pandemic.

Potential for Boomerang Workers from the Tech Industry

During the pandemic, many hospitality workers shifted to the tech industry to find employment as demand in that sector surged. Now, as the tech industry faces economic headwinds and the hospitality sector experiences growth, there is potential for "boomerang workers" to return to the hotel industry. This influx of experienced workers could help hotels enhance their service levels and capabilities, while providing new opportunities for individuals seeking to reenter the hospitality sector.

Options for Financing Your Hotel Investment

Looking to buy or build a hotel? There are plenty of financing options you can make use of. However, as interest rates have risen dramatically in the past year, finding the right financing option for your hotel investment is crucial. 

Here are some financing options to consider, each with its unique advantages and limitations.

Bank Loans

Bank loans remain a popular choice for financing hotel investments. With a wide range of options available, shopping around for the best deal is essential. Different banks may offer varying terms, interest rates, and loan-to-value ratios. Ensure that you compare multiple offers and select the one that best suits your investment needs and risk tolerance.

Bridge Loans

Bridge loans can be a suitable option for short-term repositioning, renovations, or stabilization of a hotel property. These loans are typically provided for a shorter period and carry higher interest rates than traditional bank loans. However, they can be a useful tool for investors who need quick access to funds and have a clear exit strategy, such as refinancing or selling the property once improvements are complete.

SBA Loans

Small Business Administration (SBA) loans are a viable option for hotel financing, particularly for smaller and independently-owned properties, like a bed and breakfast. SBA loans offer competitive interest rates, longer repayment terms, and lower down payment requirements than conventional bank loans. However, they may have more stringent eligibility criteria and involve a lengthier application process.

CMBS Loans

Commercial mortgage-backed securities (CMBS) loans are pooled together and sold to investors as securities, with the hotel property serving as collateral. While CMBS loans can provide access to large amounts of capital, today’s market makes them a less attractive option for hotel financing. However, for borrowers seeking financing that is less dependent on personal credit scores — or for those looking for a cash-out refinance — a CMBS loan can still be a competitive option.

Life Company Loans

Life insurance companies offer loans for institutional-grade assets in major markets. While these loans can provide competitive interest rates and flexible terms, they are generally limited to high-quality, well-located properties. If your hotel investment meets these criteria, a life company loan could be a suitable financing option. However, it is essential to note that most life insurance companies won't provide loans for anything but institutional-grade assets in major markets.

Conclusion

The hospitality industry in 2023 is poised for strong growth, despite potential headwinds and recession fears. Key drivers such as rising RevPAR, positive GDP growth, easing of travel restrictions, and robust business travel demand are contributing to this optimistic outlook. Additionally, the slowdown in transaction activity could present opportunities for buyers to capitalize on the market and secure advantageous deals.

As the industry navigates the challenges of inflation, workforce changes, and higher interest rates, investors must carefully assess their financing options and practice due diligence in all transactions. By understanding the market dynamics and adapting to evolving trends, hoteliers and investors can seize the opportunities presented in 2023 and beyond.