NEW YORK CITY — The NYU School of Professional Studies Jonathan M. Tisch Center of Hospitality and management consulting firm Boston Consulting Group recently collaborated on a survey of hotel owners, management companies and other industry stakeholders to gauge their sentiment and prospects for the hospitality industry. The resulting white paper, “Hotel Borrowing Costs are Rising—But So Are Occupancy Rates,” projects positive outcomes based upon rising demand that will bolster key industry metrics, such as occupancy rates, average daily room rates and revenue per available room, while new construction is down to 2015 levels.
Presenting the paper at the NYU International Hospitality Industry Investment Conference, Adam Goldberg, a partner with Boston Consulting Group, noted the “very bullish outlook on demand” that had been heard throughout the panels. “Four out of five of the respondents in our survey believe that demand will continue to increase around the end of this year, and almost 50 percent of the respondents to our survey felt very strongly that next year demand will significantly increase,” Goldberg said.
In a statement released during the event, Sean Hennessey, associate professor at the NYU SPS Tisch Center of Hospitality and contributor to this white paper, said that while inflation increases operating costs, it can also help accelerate room rate growth. “Further, interest rates rise in an inflationary environment, which affects the feasibility of new construction. On balance, the profitability outlook is attractive.”
At the presentation, Hennessey noted “substantial risks in terms of cost of capital and financing,” and said the survey made it clear that most investors step back when interest rates and cost of capital gets too high.” The “magic number,” he added, appears to be around 8 percent.
“Uncertainty, inflationary fears, and elevated interest rates will likely be with us for a while,” Tom McCaleb, managing director and partner at BCG, added. “All can have a chilling effect on hospitality investment. Despite these concerns, our latest work with the Tisch Center shows that strong room demand will keep the hospitality industry an attractive investment for the foreseeable future.”
Survey Highlights
Guest Demand: A Major Source of Optimism
- More than 70 percent of survey respondents anticipate demand will at least somewhat increase by the end of 2023, and 42 percent expect significant increases in 2024.
- Hoteliers are looking for nominal revenue increases of 4.6 percent to 5.1 percent in 2023. Those expecting a significant increase in demand anticipate revenues to rise by about 12 percent.
- Real growth rates seem likely to exceed the rate of inflation. The revenue increases will be driven by both volume and price.
- Hoteliers expect room rates to rise 8.3 percent to 8.8 percent over the next 18 months, expanding gross margins by about six percentage points.
Interest Rates: The Biggest Threat for Investors
- Even though hotel industry participants expect the inflation rate to drop below 5 percent by the end of 2024, they are nonetheless wary.
- High-interest rates spook investors in hotels as in other commercial property sectors. In the current environment, 82 percent of hotel owners view the hotel industry as less attractive than other investment classes.
- The industry is approaching a trigger point. A summary of recent hotel financings shows spreads topping out at 400 basis points above the secured overnight financing rate, which itself is approaching 5 percent.
- In this survey, 89 percent of hoteliers consider rates above 8 percent unacceptable for taking out a loan.
Persistent Labor Challenges Add to Investor Reticence
- Prolonged staffing shortages add to investor concerns; 70 percent of hotel owners view the hotel industry less attractive if labor problems persist.
- More than 60 percent of respondents reported that they are somewhat or severely short-staffed, which NYU SPS/BCG estimate costs hoteliers about seven percentage points of revenue and two points of operating margin.
- More than 75 percent of respondents experienced modest or better labor productivity gains in the last three years and are optimistic about improving employment going forward. More than 60 percent expect continued improvements in 2023, and 100 percent expect significant improvements in 2024.
- Two challenges still need to be solved in this area: the number of job openings and decreases in real earning potential for industry workers.