Hotel executives exude confidence in US travel demand despite headwinds

The shutdown of the U.S. federal government didn't do businesses any favors in terms of consumer sentiment, but hotel company executives seem to be holding out hope.

The University of Michigan's most recent survey of consumers showed the lowest sentiment in three and a half years amid worries about economic fallout from the shutdown. The university's Consumer Sentiment Index fell to 50.3 in early November, the lowest mark since June 2022.

But speaking during recent earnings calls, hotel brand and real estate investment trust leaders both expressed optimism in continued travel spend. Here's some highlights from that commentary.

“As we look ahead, we're optimistic about the next phase of the U.S. lodging cycle and its impact on new construction openings. In the U.S., we expect last week's lowering of interest rates, continued investments in the build out of [artificial intelligence] infrastructure and a constructive regulatory environment will drive stronger demand, especially for our travelers.

“Combined with low industry supply growth, continued favorable demographic trends and significant demand catalysts such as the 2026 World Cup, the U.S 250th anniversary and the Route 66 centennial, these tailwinds are expected to generate incremental travel across our markets and set the stage for stronger RevPAR growth in the years ahead. Backed by the strength of our core travel base — retirees, road trippers and America's blue- and gray-collar workforce — our purpose-built hotel portfolio is well-positioned for sustained growth.

“As we look for signs as to when the cycle in the U.S. may turn positive for our business, two indicators are moving in the right direction. First, our economy transient segment occupancy performance has begun to improve year to date and has shown year-over-year growth in each of the last two quarters, excluding the impact of the third-quarter 2024 hurricane. This segment was also the first to recover after the last period of demand softening, followed by the midscale segment. Second, occupancy index across our entire U.S. portfolio is up slightly year to date, a constructive early indicator that in prior cycles has preceded broader U.S. RevPAR growth.”

Asked if there's a structural problem with the economy segment: "We're moving into our slowest quarter of the year. And despite the softness that we talked about in Texas, California and Florida, we are seeing nothing structural that that concerns us in any of the leading indicators that we look at daily.

"Our booking lead times, they're up 2% to prior year. Our lengths of stay are consistent with last year. If we thought something structural was was happening, that would not be the case. And our cancellation rates have have actually improved over last year by 160 basis points in Q3 versus prior year. So on those indicators, we feel good. ... [This year] we're seeing occupancy down across all chain scales year over year, with the divergence of RevPAR really being driven by ADR, with the upscale segments taking rate, while the economy and midscale where we're concentrated are not.

"Occupancy, as we all know, is not recovered to pre-COVID levels in any segment, but it has more so in economy and midscale. ... So the question you ask in terms of, is there anything structural that we're seeing out there — aside from persistent inflation and consumer uncertainty and immigration and in some of those states that we mentioned that aren't helping — is the upscale hotels are able to price more aggressively to inflation than the lower chain scales are where the guest is obviously more price-sensitive. ... Luxury is the only segment, as we know, that's been able to outpace inflation growth at 26%, which is very good news for economy and midscale segments from a pricing power standpoint, moving longer term, especially as wage growth continues to outpace inflation, providing upside when that consumer confidence stabilizes and we get back to that 2% to 3% [compound annual growth rate]."

"Despite the slight decline in RevPAR, our out-of-room revenues increased 5.1%, resulting in total RevPAR growth of 1.5%. Total RevPAR grew in both our urban and resort portfolios.

"Food and beverage was once again a bright spot, both on the top and bottom line. F&B revenues increased 4%, with banquets and catering up almost 8%, while outlets were down modestly. Last quarter, we highlighted that our food-and-beverage margins expanded by 105 basis points. This quarter was even stronger with F&B margins expanding by 180 basis points, aided by our continued efforts in reengineering menus and focused staffing.

"Other contributors to the increase in out-of-room revenues in the quarter included spa, parking and destination fees, which were each up over 10%."

"We talk a lot about differentiation amongst our resorts, but our resort ADR over the course of the year in totality is roughly $400. We just don't have a lot of lower-end exposure to the resort space.

"I think seasonally, like we — our exposure to sort of the mid-price customer is like August and South Florida. It doesn't mean that those hotels are necessarily mid-priced hotels. It's just there's a moment in time where we kind of cater to a different part of the population. But I think in the aggregate, we kind of have a higher-end resort exposure, which has done better given what we've seen kind of the differentiation in economy."

...

"We have a fairly significant spa business at three to four hotels. And so we saw a nice uptick double digit on our spa revenue and then the other that falls in there are just resort and destination fees.

"So I think the nice thing about all of those revenue streams [parking, spa and resort fees] is they tend to also be non-commissionable. The costs associated with them are pretty much fixed. So if we can move parking $5, for instance, or we can move the cost of a spa treatment up $10, most of that does flow to the bottom-line. It doesn't really change the cost model of providing the service."

"As I lift up and think about the opportunity ahead, I remain optimistic about the next few years. We continue to believe that in the U.S. lower interest rates, a more favorable regulatory environment, certainty on tax policy and a significant investment cycle will result in accelerated economic growth and meaningful increases in travel demand. This, when paired with limited industry supply growth, should drive stronger RevPAR growth over the next several years."

"Leisure demand continues to be very strong. We've mentioned all of the various data points in our script, but just taking a real-time gauge of this, leisure demand in the U.S. was up 3%, globally up 7% in October. So this is not abating. I think there's been incessant questions about, 'Can leisure really hold up? Can you really maintain pricing levels?' Etc., etc. The answer is the data continues to prove it. I'm not sure what other proof is required. We're seeing it in all of our numbers. Yes, we do serve a different customer base, so I'm not making any comments about midscale and below. I am making a comment about us."

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