Forecasters Cut Outlook for Hotel Demand – Even Luxury Is Slowing Down

STR and Tourism Economics lowered their forecast for U.S. hotel demand growth this week. The benchmarking firms now project a more modest 2.1% increase in average daily rates this year — down from the previous estimate of 3.1%.

“Everyone in the hotel sector is saying we don’t have as much leisure [demand] on weekends,” said Amanda Hite, president of CoStar’s STR, during an interview at the NYU International Hospitality Industry Investment Conference.

While the industry remains cautiously optimistic about the remainder of the year, the recovery of lower-tier hotels hinges on the return of leisure travel and potential interest rate reductions.

CBRE, a real-estate consulting firm, also downgraded its forecast this week. It now predicts similar growth in the average hotel daily rate of only 2.4% in 2024.

A rise in the 2.1% to 2.4% range would be less than the 3.4% rise in inflation expected by 34 forecasters surveyed by the Federal Reserve Bank of Philadelphia. 

Several CEOs of major hotel groups spoke this week at the NYU conference and didn’t dispute softening forecasts for leisure demand. However, the CEOs emphasized how group bookings for events were up significantly year-over-year and that some markets, such as New York City, were growing strongly.

“During the CEO panel this afternoon, the messaging from the [hotel groups] seemed more long-term than short-term in orientation and the CNBC moderator called out (correctly in our view) this shifting narrative,” wrote analysts at Truist Securities in a report. By “shifting narrative,” the analysts meant that the CEOs sought to tell a positive story and did that by overlooking short-term uncertainty.

Lower- and Mid-Tier Challenges

“The first months of the year broadly saw a moderation in demand across the hotel industry,” Hite said. “Some segments saw declines, and even in segments where demand grew, the growth was moderate.”

Lower-tier and mid-tier hotels saw more weakness than expected in the first quarter.

“Middle-income to lower-income consumers are feeling pinched by inflation, and some are cutting travel out,” Hite said. “If inflation keeps coming down, that will give them some relief, but I don’t think it’ll be enough until interest rates start to come down and make it cheaper for consumers to finance their credit card debt and loans.”

Luxury Segment Risks

“The area for me that was surprising was the downward revision in the luxury segment,” Hite said.

The luxury segment faces greater risks due to a notable shift in the guest mix away from leisure travelers toward more group bookings and business travelers. Vacationers tend to spend more money on meals and services like spa treatments than business travelers.

“Rates will be under pressure there,” Hite said, “particularly if luxury hotels attempt to attract more leisure travelers on weekends by cutting rates.”

Supply Pressures

Hotel performance in 2024 may be tempered by many new hotels scheduled for completion this year. CBRE said the growing supply of short-term and vacation rentals and the return of discounted cruise ship itineraries may also cause competition.

Uncertain Economic Direction

The U.S. annualized economic growth rate has fallen from 4.8% to 3.4% to 1.3% over the past three quarters.

Case for Optimism

Reductions in interest rates could help alleviate some of the financial pressure on consumers, potentially boosting demand for lower-tier hotels.

If the Federal Reserve cuts interest rates, there is optimism that hotel demand will improve in the remaining months of the year, with less severe declines thanks to a generally better economic environment.

A side note: National political conventions are expected to increase demand in host cities. For example, the Republican National Convention in Milwaukee is expected to bring about 50,000 visitors for a week in July. Plus, in the fall, campaigning will moderately depress demand in Washington, D.C.

However, elections haven’t significantly impacted hotel demand outside these events in recent history, Hite said.

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