2023 Hotel Sector Performance & Outlook

The Impact Of Inflation On The Hotel Sector

CBRE expects the Consumer Price Index in the U.S. to rise by 3.5% year-over-year in 2023, and while inflation has both positive and negative effects on the hotel sector, it is likely to increase top-line growth while putting pressure on margins.

The hotel industry is experiencing the impact of inflation on development activity. The rising costs of construction materials, along with a tight labor market and high interest rates, are expected to reduce supply growth by 40% over the next five years compared to historical trends. 

As a result, the focus of cash flows in the near term is likely to shift towards debt reduction, renovations, and remodels, due to the backlog of capital expenditures created during the pandemic. 

Strong Demand For Hotels

Due to the strong rebound from COVID-19 and the positive outlook for travel in the months and years ahead, demand for hotels is strong.

CBRE has lowered its demand growth forecast from 3.3% in August 2022 to 2.9% in November 2022 due to its projection of a 0.2% decline in 2023 gross domestic product (GDP). 

However, this demand is still significantly higher than the projected supply increase of 1.2% for 2023, meaning that demand will outpace supply.

That being said, the reduction in occupancy growth forecast for the year is estimated to be 1.6%, down from the previously predicted 2.0%, thus partially offsetting the positive outlook for ADR (average daily rate) growth.

Hotels In Strong Transit-Oriented Locations 

You know what they say – location, location, location. Real estate is hyperlocal, and the hotel industry is no different.

As we look to potential hotel acquisitions, we are targeting transit-oriented locations for investment. A hotel located near transportation corridors will be more visible and accessible to potential guests, which can increase the likelihood of bookings and occupancy rates. 

Guests who are traveling via these transportation corridors may be more likely to choose a hotel that is conveniently located near their point of arrival or departure. Areas surrounding transportation corridors often have a developed infrastructure, including restaurants, shopping centers, and other amenities that can attract guests. 

A hotel located in such an area can offer its guests a range of nearby services and attractions, which can help to increase guest satisfaction and generate repeat business. 

Further, transportation corridors are often subject to ongoing development and expansion, which can increase the value of nearby properties over time. This can provide investors with an opportunity to benefit from capital appreciation and potentially sell the property at a higher value in the future. 

Many business travelers prefer to stay in hotels that are located near transportation corridors for convenience and ease of access. A hotel located near a transportation corridor can benefit from this demand for business travel and can potentially generate higher room rates and revenue.

Hotels That Target Business Travelers

When looking at potential hotel acquisitions, a big part of our strategy is thinking through and analyzing seasonality, to ensure any hotel assets we acquire maintain strong occupancy year-round.

Business travel is often less seasonal than vacation or leisure travel, meaning that hotels that cater to business travelers may be able to maintain higher occupancy rates year-round. 

This can provide a more reliable income stream for investors. On top of that, business travelers are often less price-sensitive than vacation travelers, which can lead to higher room rates and revenue per available room (RevPAR). This can result in higher profitability for the hotel and potentially higher returns for investors. 

Overall, the demand for business travel is generally more stable than vacation travel, which can provide greater stability for the hotel’s revenue and profitability over time. This can make the investment less risky and more predictable. 

Further, business travelers often travel to the same destinations on a regular basis, which can result in repeat business for hotels that cater to this market. This can help to build a loyal customer base and increase the hotel’s occupancy rates and revenue. 

Hotels that primarily cater to business travelers may require fewer capital expenditures than those that cater to vacation travelers. For example, business travelers may not require the same level of recreational amenities, such as swimming pools or spas, which can reduce the hotel’s operating costs.

Case Study – Goodegg Hotel Portfolio – Munster, Indiana

Through Goodegg Diversification Fund II, we acquired a portfolio of two select-service hotels in 2022, and the results have been fantastic for our investors. 

Homewood Suites and Hampton Inn & Suites in Munster, Indiana, were the target of our acquisition efforts. Munster is conveniently located at the first exit when entering Indiana from Chicago and is only a short distance from downtown Chicago, thus providing a strong transit-oriented location.

Furthermore, these hotel assets are fully stabilized and offered the potential for high cash on cash returns and portfolio diversification. In fact, the average realized investor distribution for this hotel portfolio in 2022 was 11.33%.

The room revenue, average daily rate, and gross operating profit for both hotels in this portfolio is up significantly year-over-year, and we anticipate that strong performance to continue.

Our strategy is to hold the properties for approximately 5 years, while making improvements to optimize their performance. These two deals are a great base case that shows what kind of assets we will look to purchase as we acquire additional hotel assets.