The dynamic landscape of the U.S. hotel industry was the focus of a recent episode of America’s Commercial Real Estate Show. The guest, Ryan Meliker, president of Lodging Analytics Research and Consulting (LARC), provided a deep dive into current trends, challenges, and opportunities shaping the hotel market. This article highlights key insights from their conversation, offering a detailed look at the performance of different hotel segments, the impact of business travel, the resurgence of conventions, and predictions for market growth and investment.
Winners and Losers in the Hotel Industry
Meliker started by explaining that the hotel industry, like many other real estate sectors, has seen a bifurcation in performance, with clear winners and losers. Certain markets and asset classes are performing exceptionally well, while others are struggling. He pointed out that large group-oriented hotels and properties benefiting from international inbound travel have seen a notable rebound, especially in urban areas. Meanwhile, hotels catering to domestic leisure travel, particularly in beach markets like Myrtle Beach and Virginia Beach, have witnessed a moderation in demand after a strong pandemic recovery.
Business Travel: Recovery Still Lags
A significant topic of discussion was the state of business travel, which has been slow to recover fully. While business travel is better than it was in 2021 and 2022, it remains about 10% below pre-pandemic levels. Meliker emphasized that the shift to remote work has had a profound impact on corporate transient demand, as fewer employees are physically present in offices. This has led to shorter and less frequent business trips, mirroring the lower occupancy rates in office buildings.
Convention Business Booming
In contrast, the convention sector has shown strong growth. Meliker explained that group travel is doing particularly well, in part due to the remote work culture. With employees not spending as much time in offices, conventions and in-person gatherings have become more valuable as opportunities for teams to collaborate and network. Convention bookings across the 30 largest centers in the U.S. are up 4% in 2024 and expected to rise another 3% in 2025. This growth trend is expected to continue over the next five years, providing a positive outlook for urban hotel markets.
Trends in Hotel Rates and Valuations
When it comes to average daily rates (ADR), the hotel sector has seen slow but steady growth. Higher-end hotels have performed better, thanks to the recovery in corporate transient and group segments. However, lower-end hotels have struggled due to the slowdown in domestic leisure demand. Meliker projected a modest uptick in ADR growth of around 3% in 2025, supported by improving consumer confidence and stable demand.
Valuations in the hotel market are also trending upward, driven by modest growth in cash flow and easing cap rates as interest rates stabilize. Meliker pointed out that while transaction volumes were slow in early 2024, they are picking up and could see significant improvement in 2025. However, the ability of buyers and sellers to agree on pricing remains a critical factor for deal completion.
New Hotel Supply Remains Muted
A key takeaway from the conversation was the limited growth in new hotel supply. Over the next five years, hotel supply is expected to grow at a compound annual rate of just 1%, far below the long-term average of nearly 2%. This slower pace of development is a positive factor for existing properties, as demand growth is expected to outpace new supply, giving hotels more pricing power. However, Meliker warned that certain markets, such as Atlanta, could face oversupply challenges if large-scale developments significantly increase hotel room inventory.
Markets to Watch: Las Vegas, Puerto Rico, and Seattle
Meliker highlighted several markets that he believes are poised for strong growth. Las Vegas, long known as a gambling destination, is rapidly transforming into a sports and entertainment hub, with events like Formula 1, the Super Bowl, and a growing roster of professional sports teams driving demand. Puerto Rico also stands out due to substantial federal investment in its energy infrastructure, which is expected to remove significant barriers to real estate investment, including hotels. Lastly, Seattle’s combination of strong convention bookings, international travel, and Amazon’s recent decision to bring employees back to the office full-time makes it an attractive market for hotel investment.
Markets Facing Challenges: Austin
Not every market is experiencing a boom. Austin, a city that has seen rapid growth in recent years, is facing significant headwinds. The closure of its convention center for at least five years is expected to have a substantial negative impact on the local hotel market. In addition, the rising costs associated with union labor in major urban markets like San Francisco, Los Angeles, and New York are adding pressure on hotel operators, making profitability more challenging.
The Impact of the 2024 Presidential Election
Looking ahead, the upcoming U.S. presidential election is likely to influence hotel demand. Historically, election years have been associated with slower GDP growth, reduced business investment, and lower demand growth in the hotel sector. Meliker pointed out that while the results of the election itself are important, the broader economic policies that follow—such as tax cuts or changes to healthcare subsidies—could significantly impact hotel performance.
Conclusion: Pay Attention to Market-Specific Drivers
Ryan Meliker’s parting advice for hotel investors was to focus on the specific drivers of demand in each market. A one-size-fits-all approach will not work in the hotel industry, as different markets are driven by unique factors such as conventions, business travel, or leisure tourism. Understanding the nuances of each market and asset class is key to making wise investment decisions in this complex and ever-evolving sector.
This episode of *America’s Commercial Real Estate Show* provided a comprehensive look at the trends shaping the hotel industry, offering valuable insights for investors, operators, and anyone with an interest in commercial real estate.