Over the last four years, few industries have experienced disruption quite like the hospitality industry.

First the lockdown measures and travel restrictions of 2020 and 2021 brought demand to a standstill, leading to significant declines in occupancy and revenue. In 2022, after lockdown restrictions lifted and travel skyrocketed, hospitality experienced a similar rebound. Some chain scales even surpassed their pre-pandemic levels as a result of the drastically heightened demand. Hotel performance had reached the stratosphere.

But now, two years later, we’re starting to see a return to earth.

As the President of the largest and most active digital CRE auction platform, I see the developments in the hospitality industry firsthand through hotel performance in biweekly auctions. These online auctions deliver a clear snapshot of how various hotel segments are adapting to ongoing economic shifts, with implications for both current property values and future investment strategies in the hospitality industry.

Hotels by Numbers: What’s Currently Happening in Hospitality?

Examining STR’s report of U.S. hotel performance through Q1 2024, we can see a pattern emerging—operating costs are on the rise, while revenue lags behind. Let’s start with a look at three key metrics—occupancy rates, average daily rate (ADR), and revenue per available room (RevPAR).

From March 2023 to March 2024, we see a slight decline in occupancy rates—down 2.5% year over year. Over the same 12-month period we saw very minimal ADR growth at just +0.4%. While this is an increase, it remains below the inflation rate, and this is not an anomaly. February 2024 was the only month since November 2023 where the ADR increase did come above the rate of inflation. Even as pricing remains largely level, real value may be eroding.

But where we really want to take a look is RevPAR. For the first time since February 2021, RevPAR has declined (-2.2% YoY). You might say this could be attributed to calendar changes. Easter 2024 occurred in March rather than April, and March 2024 had five Sundays versus 2023’s four Sundays. But these declines began earlier in the month, before the calendar changes came into effect.

Looking at these numbers together—occupancy rates falling, a consistent pattern of ADR failing to match the rate of inflation, and revenue declining for the first time in over three years—we can see the signs of the market adjusting to rising operational costs.

Bottom-line metrics are a bit more mixed. Total revenue per available room (TRevPar) did increase 2.5% YoY, reaching its highest level since 2018, well before the start of the pandemic. But in this same period we also saw labor (LPAR) grow three times as much as revenue, resulting in gross operating profit per available room (GOPPAR) decreasing by 1% year over year. We see an even more significant decrease in Earnings Before Interest, Taxes, Depreciation, and Amortization Per Available Room (EBIDTA PAR), which dropped by 2.9%. The market is shifting, and operational costs are rising.

Performance is not necessarily down across all chain scales. Upper upscale hotels began 2024 with a strong Q1 performance, with a 1.9% ADR increase and a 0.9% occupancy increase. The luxury hotel chains excelled in demand with a 9% increase, though ADR saw a 2.4% decrease. Midscale and economy hotels, however, have struggled in the past year. Demand has decreased for the past four quarters in economy chains, the past three quarters for midscale, and two quarters for Upper Midscale.

Looking at the chain scales above, it’s clear to see that lower- to middle-income travelers are the ones primarily impacted by broader economic pressures including rising interest rates, rising prices, and debt load and costs. The customers who make up a significant portion of Upper Midscale, Midscale, and Economy customers are facing an economic squeeze and are likely to travel less than they have over the past two years.

Despite these fluctuations, there is a sense of optimism in certain portions of the market. Q1 saw a marginal increase (+1.5%) in rooms under construction, the first increase since a wave of decreases that began in June 2023. Occupancy on the books through the first two weeks of May 2024 showed a year-over-year increase from 2023, while forward bookings through mid-July appear to be largely level with 2023. Q1 may have seen lower occupancy levels than anticipated, but Q2 has largely seen a return to a more stabilized performance, indicating signs of growth going forward.

What Could This Mean for Hotel Sales?

Given the slight decline in RevPAR and the mixed performance across various chain scales, potential buyers and investors might reassess the valuation of hotel properties. The decreased profitability, as indicated by lower GOPPAR and EBIDTA PAR, may lead to more conservative valuations and lowered sale prices. Hotels in markets outside the Top 25, and particularly those not benefiting from the transient upsurges or group demand recoveries, may face steeper challenges in maintaining their market value.

Investors are likely to become more cautious, especially with the first decline in RevPAR since early 2021 signaling a potential market shift. This could result in a slowdown in transaction volumes as investors wait for clearer signs of stability or recovery. Moreover, the investor focus may shift more towards properties in markets that show stronger resilience or growth potential, or those benefiting from business travel recoveries.

With rising operational costs and the tightening of monetary policy (as reflected in the broader economic indicators and interest rate hikes), financing conditions could become more stringent. Banks and financial institutions may tighten lending criteria for hotel acquisitions or refinances, demanding higher equity contributions or offering less favorable loan terms. This tightening could dampen the pace of real estate transactions in the hospitality sector.

The current market dynamics might encourage strategic behavior changes amongst large hotel chains and real estate investment trusts (REITs). For instance, there might be increased interest in acquiring properties that cater to upper upscale and luxury segments, which despite facing ADR pressures, still show strong demand. Conversely, properties in the midscale and economy segments might be considered for divestiture due to their declining performance.

Properties that have demonstrated resilience or have unique selling propositions—such as prime locations, newly renovated spaces, or strong operational efficiencies—will continue to attract investor interest. In contrast, properties that have underperformed may need to differentiate through aggressive marketing, rebranding, or repurposing to appeal to changing traveler demographics and preferences.

If there is one key takeaway I can leave here, it is this—navigating these current market conditions requires a great deal of care and nuance. Detailed market analysis of both macroeconomic trends and micro-market conditions, robust financial modeling, and strategic asset management are the keys to making effective investment decisions in the ever-changing hospitality real estate market.

The Current Trends in Hotel Auctions

In 2023, Economy hotels saw a moderately high activity level and a 61.4% trade rate, suggesting a consistent investor interest likely driven by the affordability and stable demand associated with economy hotels.

The Extended Stay segment demonstrated robust performance in a single property auction with a 100% trade rate and $13,500,000 high average value, indicating a premium placed on such properties. This is likely due to their higher revenue-generating potential and adaptability to market conditions.

The Luxury segment experienced a more mixed reaction, seeing a 50% trade rate. This reflects a selective market where only specific, highly appealing luxury properties are likely to sell, possibly affected by their high operational costs and economic uncertainties.

Midscale hotels saw significant activity with moderate average values at a 66.67% trade rate, suggesting these properties are considered stable investments without the high risks associated with more upscale markets.

Both Upper Midscale and Upscale hotel segments show more cautious activity, with trade rates of 49.23% and 51.35%, respectively. These figures indicate a more measured investor approach, possibly due to higher values and associated risks.

Now, Let’s Take A Look at 2024’s Trends

Economy and Midscale hotels are starting with a slowdown. The lower trade rates for Economy (41.67%) and Midscale (28.57%) segments suggest a cooling off in these markets, possibly due to economic pressures or a saturation in low to mid-tier hotel investments.

Contrarily, Upper Midscale shows a significant increase in trade rate to 78.57%, suggesting a shifting investor focus toward slightly higher-end properties that might offer better margins or perceived stability.

Upper Upscale is facing an uphill battle. A 0% trade rate for the two properties auctioned reflects significant challenges in the high-end market segment, potentially due to high asking prices not meeting buyer expectations or the specific economic conditions impacting luxury spending.

The Upscale segment, on the other hand, maintains a steady market with a 50% trade rate, indicating continued interest in this segment despite broader market fluctuations.

These data points suggest a nuanced market where investment trends are shifting towards segments that either offer perceived stability or value for money in uncertain economic times. The declining interest in certain sectors may also reflect broader economic trends that affect disposable income and travel spending, such as inflation or changes in consumer confidence.

Investors appear to be recalibrating their strategies in response to these changing conditions, focusing on either proven market segments or those that offer higher potential returns on investment. The data also suggests a need for sellers in the luxury and upper upscale segments to adjust expectations or enhance value propositions to attract buyer interest.

While it’s impossible to fully predict the future trajectory of the hospitality market, the power of auctions extends beyond the transaction. They offer a dynamic platform for real-time market pricing that reflects the immediate pulse of demand, not only empowering buyers and sellers to meet their financial objectives in a fluctuating economic landscape but also providing strategic insights that can guide future investment and operational decisions.

As we navigate these uncertain times, leveraging the transparency, certainty, and speed of auctions will be crucial for stakeholders looking not just to survive but to thrive in the ever-evolving hospitality industry.

Reprinted from the Hotel Business Review with permission from www.HotelExecutive.com.