After the gyrations of the COVID-19 pandemic, a guest speaker at a lodging conference quipped: “May you live in precedented times.”
His point was that the rapid changes and the term “unprecedented” that permeated the conversation were nerve-wracking. We data analysts especially have longed for the relationship in the data that we had seen before, and data that was “precedented,” so to speak.
I feel this again in the ongoing period, characterized by the term "uncertainty." After the Trump administration imposed tariffs on many goods from many trading partners, and those tariffs were challenged in court, it left many analysts with a distinct sense of uncertainty. In the hotel industry, the uncertainty of the corporate clients translated into less activity or shorter booking windows.
I have been interpreting hotel data for over 20 years and took certain patterns as immutable facts. Unfortunately, this year, three of those “known knowns,” as Donald Rumsfeld famously called them, turned out to be incorrect.
GDP growth does not equal demand growth
The logic here is straightforward. As the American economy grows, more companies and leisure travelers have more money to spend on more hotel stays. We measure the macroeconomic output through the gross domestic product, or GDP percent change. And the GDP growth outlook for the year has been quite robust: over 2% according to Oxford Economics. However, room demand is now lower than it was a year ago, and barely above 2019 results.
The one-to-one relationship between GDP growth and demand growth — which had been evident since the 1990s — broke in 2020. We have been playing catch-up ever since. What’s worse, given the trajectory of the GDP growth line and the demand growth line, it appears that they will not grow in lockstep for some time to come.
Part of what can explain the disconnect is that American leisure travelers continue to choose different accommodation options from short-term rentals to cruises. In addition, the GDP growth number is buoyed by spending on data centers and technology infrastructure, which in turn does not drive a lot of money into individual consumers' pockets. The class performance is evidence of a deterioration in lower-end customer spend and occupancies and room rates from the upscale class on down have suffered this year.
Looking ahead, I do not expect that increases in U.S. GDP will translate into much more leisure spending. GDP growth may support corporate travel and group demand from companies in the technology sector, or what Jonathan Gray from Blackstone dubs the “picks and shovels” suppliers of the new players in the economy. However, that growth appears to have positively affected room demand only at the very high end so far.
Inflation growth does not equal ADR growth
What makes the hotel asset class different from all other commercial real estate asset classes is the length of our lease: just one night. Offices, industrial space, or malls lease their space on a five- or 10-year basis. Therefore, the common wisdom was that increases in costs were not a significant issue for hotel operators because they could reset their pricing every night. The thought was that as everything became more expensive — as measured by the consumer price index, or inflation — hotels could pass through that cost increase to customers through higher room rates. That no longer seems to be the case.
Oxford Economics expects that inflation will increase by around 2.8%. In the first three quarters, the U.S. hotel industry has only been able to increase room rates by 0.9%. In September, room rates decreased by 0.1% compared to the same period last year. In other words, inflation and room rate growth are disconnected.
Looking ahead, it seems that the only hotel segment that will likely maintain some pricing power is the luxury class. Even for the high-end hotels, room rate growth is only just at the level of inflation; in other words, there is no “real” growth. I do not see a real catalyst for pricing power as occupancies stay at, or just below, the 2024 level.
Weak dollar does not equal international inbound travel
Over the last year, the American dollar has lost around 10% of its value against the euro, and around 5% against the yen. Traditionally, a weaker dollar means that it is cheaper for international travelers to travel to the United States, and more expensive for Americans to go abroad. However, the latest data through August from the Department of Commerce shows that the number of travelers from abroad is down just over 2%. Conversely, and maybe counterintuitively, the number of Americans going abroad is up roughly 3%. Americans going abroad are likely part of the upper income quintile, which has been showing quite robust demand for luxury goods and services. The rhetoric around immigration from the current administration has likely also put a slight damper on the international inbound numbers.
Next year is expected to be a banner year for international inbound travel to the U.S., driven largely by the FIFA World Cup. However, outside of that monthlong tournament, it remains to be seen if a weaker dollar can attract more travelers.
These three rules of thumb appear to be currently suspended. It’s not that they are no longer true, but patterns in the U.S. hotel industry that were tried and true in the past seem to no longer hold. New patterns will certainly emerge, but they will take some time to play out. I can only hope, for the sake of my fellow data analysts and myself, that we can soon return to normal patterns and, as the speaker suggested, precedented times.
Jan Freitag is the national director for hospitality market analytics at CoStar.
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