I’ve had the opportunity to take a number of business trips in the last several months, and when I do so, I always look forward to the predictable level of service and quality that I find at select-service hotels like Hampton Inn and SpringHill Suites.
At these smaller select-service hotels, you’ll find things like a small lobby market rather than a full restaurant and bar, and a modest gym and pool rather than a full-service spa. As an investor myself (as well as avid underwriter and acquisitions nerd), I love select-service hotels for their efficiency and stability.
As it turns out, many companies that are starting to expand their business travel budgets are favoring select-service hotels as well, which makes them a great opportunity as business travel continues to recover.
But what about the hotel industry as a whole? Are people traveling at the same rates as they were pre-pandemic? What types of hotels are worth investing in, and what are the things to watch out for? That’s exactly what we’ll cover in this deep dive on the current state of the hotel industry.
Related: 10 Reasons To Invest In Hotels
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2024 Hotel Revenue Outlook
The future looks bright for the hotel sector in 2024 and beyond, particularly with rising economic optimism and the potential for falling interest rates.
Ths US hotel industry ended 2023 with record highs in average daily rate (ADR) and revenue per available room (RevPAR) – two of the key indicators in the hotel industry that measure performance, growth, and potential.
Experts forecast further growth in 2024, driven in part by the continued rise in post-COVID travel, as well as projected growth in corporate profits, which in turn will lead to increased spending on business travel. In other words, as businesses are starting to recover and stabilize, they’re starting to increase their travel budgets.
Amanda Hite, president of STR, CoStar’s hospitality analytics firm, recently unveiled a new projection indicating a 4.1% increase in RevPAR (revenue per available room) in 2024. This growth in RevPAR is fueled primarily by growth in ADR (average daily rate), which is driven by demand for hotel stays. This indicates that demand will continue to stay strong throughout 2024, which in turn will drive up the overall revenue potential across the hotel industry.
Projections indicate growth across all hotel chain scales – from budget hotels to select-service to luxury hotels – with even the most impacted segments of the industry expected to see at least a 1% uptick in RevPAR, which bodes well across the board for hotel investments.
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Profit Margins – Increase In Labor And Insurance Costs
While top-line revenue is expected to increase in 2024, it’s also important to take a look at expenses, to better understand the whole picture. Overall, profit margins are stabilizing across the hotel industry and are just about back to where they were pre-pandemic, in 2019.
US hotel revenue and profitability saw a rise in 2023, with significant increases in hotel gross operating profit per available room (GOPPAR), and profit margin stabilization is expected in 2024.
That being said, the strength of the labor market, uncertainty in an election year, and geopolitical instability all play a role in overall hotel profit margins, so it’s important to take those into account as you’re considering hotel investments.
As for the Goodegg Portfolio, we have seen labor and insurance costs grow in 2023 for our hotel assets, and we anticipate the high growth rate of these expenses to taper off in 2024 from a post-COVID high.
Although the rise in expenses puts a dent in overall profits, the continued top-line revenue growth has outpaced the expense growth, providing a path toward increasing the bottom-line NOIs (net operating incomes) in our portfolio.
In other words, because overall revenue is rising due to strong travel demand (particularly in business travel, as we’ll dive into next), and at a pace faster than the rise of labor and expenses, hotel assets continue to grow in profitability, making for a strong investment.
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download track recordPost-COVID Business Travel Normalization
Let’s face it – business travel has fundamentally changed. Office values have dropped significantly as a result of the emerging hybrid workforce, which in turn is impacting the need for workers to be based in city centers.
As inflation slows down, and concerns about a recession wane, coupled with restrained supply growth, the hotel sector anticipates a period of gradual and consistent expansion.
While global business travel spend is expected to surpass its pre-pandemic level of $1.5 trillion in 2024, many businesses are prioritizing cost management when it comes to travel. Only essential trips will take place, which bodes well for the select-service sector (more on that in a bit).
Further, domestic business travel will likely recover slower than international travel, due to a potential economic slowdown in the US. That being said, overall demand is projected to keep rising, bolstered by a notable upturn in the group segment (think conferences and events), which stands out as a highlight in the current forecast.
Overall, business travel is forecasted to continue to improve in 2024. Increased airport passenger traffic in early 2024 suggests a continuing upward trend, particularly for business travel.
On top of that, it’s evident that office occupancy rates won’t return to pre-pandemic levels, meaning that companies will need to figure out new ways for employees to come together, and business travel is a significant part of that puzzle.
With hybrid work arrangements becoming the norm, business travel is foreseen to become more commonplace and active. Overall, a modest increase in hotel occupancy is anticipated over the coming years.
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Continued Price Disconnection Between Buyers & Sellers
If interest rate cuts come later in the year as predicted, the general consensus is that deal returns will improve in the coming weeks and months. This should lead to more transaction activity as buyers’ underwriting will be able to get closer to sellers’ asking prices.
However, the anticipated price reset has yet to materialize, particularly affecting downtown hotels catering to business travelers, where determining value remains challenging due to differing price expectations between buyers and sellers.
Despite this, numerous funds raised in recent years are eager to invest capital, potentially aligning with owners’ decreased appetite to finance property improvement plans (PIPs). Consequently, some owners may opt to sell, facilitating price discovery. Moreover, the fear of missing out on potential value acceleration may prompt funds to act and overpay for assets.
All in all, we are still in a period of flux, as far as pricing is concerned, but we remain steadfastly committed to our underwriting standards and strict criteria when it comes to new acquisitions. What that means is that, even if we have already raised capital through our funds and are ready to place it, we will never do a deal just to do a deal. Any deal we decide to move forward with must pass our battery of tests and survive our gauntlet of analyses.
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A Focus On Select-Service Hotels
As we look to our 2024 hotel investing strategy, select-service hotels continue to be our main focus. Why? Because as mentioned above, business travel is on the rise, but many companies have more conservative travel budgets than they did pre-pandemic.
What that means is that, more often than not, companies will put their employees up in a Hampton Inn, Holiday Inn Express, or other modest select-service hotels that don’t have all the bells and whistles of a full-service luxury hotel like a Ritz-Carlton or Waldorf-Astoria.
Further, while leisure travel is arguably rising faster than business travel, it’s also more susceptible to the ups and downs of the greater economy, which means that hotels geared toward leisure travelers are not as recession-resilient as those geared toward business travelers.
That’s why, even though a Hampton Inn might not seem as sexy of an investment as a Ritz-Carlton, it’s a much better fit for our and our investors’ goals. Select-service hotels allow us to operate on a much more efficient budget and staff, are geared toward a more recession-resilient population, and allow us to mitigate risk for our investors on multiple fronts.
Summary
Overall, we continue to be optimistic about the growth and expansion of the hotel industry in 2024, and particularly within the select-service sector of hotels catering to business travelers.
The select-service hotels already within our portfolio are performing well and producing strong cash flow for investors right out of the gate, making them a great opportunity to boost the returns in your overall portfolio while also diversifying outside of multifamily.
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Next Investing Steps
Whether you’re thinking of investing in hotels, particularly select-service hotels geared toward business travelers, we invite you to invest alongside us. You can check out our current open opportunities here.
If you don’t see anything that’s a good fit currently, we invite you to join the Goodegg Investor Club, so we can keep you in the loop on opportunities to invest alongside us.
Learn More
If you’re not yet ready to invest but are curious about how all of this works, we invite you to dip your toe in the water with us through our free 7-day email course – Passive Real Estate Investing 101.
You can also get a copy of our book – Investing For Good – or check out our Life & Money Show Podcast.
To learn more about us and our experience, be sure to download a copy of our track record, which shows the projected and actual returns we’ve achieved across all the deals we’ve exited to date.
Connect With Us
If there’s ever anything we can do to help you on your journey, feel free to email us at [email protected] or call / text us at (888) 830-1450.
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