‘People Aren’t Traveling The Way They Used To’: Hotel Industry Seeks New Normal As Leisure Travel Slows

Leisure travel was the first to recover from coronavirus lockdowns, surging well above 2019 levels as cooped-up consumers rushed to spread their wings and fly literally anywhere else.

Now, though, leisure travel is normalizing, corporate and group travel have yet to catch up to prepandemic levels and demand in the U.S. hotel market is cooling faster than some expected.

Inflation, lack of inbound international travel and evolving work habits are taking a toll on hotel room demand, insiders say. And the slowdown is showing up in third-quarter earnings results and hotel market growth projections, which could impact how hotel brands and owners operate going forward. 

Hilton Worldwide Holdings dropped its top net income expectations from $1.56B to $1.43B and lowered the high end of its full-year expected revenue per available room growth from 3% to 2.5%, according to its Q3 earnings results.

IHG Hotels & Resorts is on track to finish the year in line with market expectations but saw its Americas RevPAR grow just 1.5% in the third quarter, down from 3.2% growth the prior quarter. 

Both companies pointed to softer leisure demand, a trend also being picked up by CBRE, which expects U.S. RevPAR to grow by 1.2% total this year, down from its earlier expectation of 2% growth.

RevPAR’s growth deceleration is largely tied to cooling travel demand among everyday consumers, said Jan Freitag, national director of hospitality analytics for CoStar Group. Freitag said the domestic hotel industry was hurt by inflation, which led the Federal Reserve to raise interest rates, strengthening the U.S. dollar internationally, he said. 

“The lower-end leisure traveler is really having to absorb higher costs across the board,” Freitag said. “Higher inflation is a big topic. Things get more expensive, rent and food and fuel. All of that means that discretionary spending … like vacations, experiences, travel, that really is impacted.” 

Due to the international strength of the dollar, Americans who can afford to travel increasingly opt to go overseas where their money is worth more, Freitag said. In turn, international travelers are disincentivized from visiting the U.S. 

“There is an international travel imbalance in favor of outbound,” he said. “That’s a part of the leisure softness that we see across the board. The other part is that we are looking at percentage change year-over-year … and the last couple of years were just really strong.” 

Leisure travel surpassed 2019 rates in 2022 before beginning to come back down to earth in 2023, according to the U.S. Travel Association. Business travel has not yet fully recovered, though the trade organization expects business travel to end 2024 at 95% of 2019 levels, up from 89% recovered in 2023. 

“Coming out of the pandemic in ’22 and ’23, we just saw a lot of pent-up demand, and eventually that was going to burn off,” Freitag said. “That’s not a surprise. You can’t continue to grow and grow and grow.” 

U.S. hotel occupancy dropped 2.5% in September from a year earlier and RevPAR increased 1.3%, according to CoStar data. While September 2024 was especially weak because it had one fewer weekend than September 2023, there is no catalyst that’s likely to boost hotel demand again this year, Freitag said. 

“Job growth, wage growth has to trickle down to all income levels, then those people can spend more time and money on vacation,” he said.

But blaming all of the hotel industry’s woes on the economy would be overly simplistic, according to Rachael Rothman, head of hotels research and data analytics for CBRE. A historically strong connection between GDP growth and hotel demand broke down over the past year, Rothman said.

That connection severed due to the lack of inbound international travelers and increased competition from concepts like cruise lines and short-term rentals, she said. Another significant factor is how corporate travel patterns have changed since the start of the pandemic. 

“The advent of new technologies [have] made it easier for people to have a one-off meeting,” Rothman said. “So the need to fly to California for a one-off meeting is not what it used to be.” 

Despite GDP growth seeing some upward revisions, CBRE is less than optimistic about the hotel market’s growth prospects for 2024 and 2025, Rothman said.

Hotel brands have similar expectations, at least when it comes to leisure. While group and business travel demand grew by 7% and 3%, respectively, leisure revenue ticked down, IHG Hotels & Resorts Chief Financial Officer Michael Glover said during a third-quarter earnings call. Glover characterized the hotel market as showing stability and normalization, noting that the slight slowdown follows an especially robust 2023.

“Leisure revenue was broadly flat, down less than 1% despite the particularly strong comparatives as leisure was already 34% above 2019 levels this time last year,” IHG CEO Elie Maalouf said on the Oct. 22 call. 

The normalization of leisure travel will likely continue into next year, Hilton President and CEO Christopher Nassetta said on its call Oct. 23. 

“That means, I think demand is sort of flat to maybe even down a little bit … inflation is down, but still stubbornly a bit high,” Nassetta said. 

Some of the market softness could be related to hotels valuing room rates over occupancy, Rothman said. Significant labor strikes are another factor cited for weakened third-quarter performance. 

“Wage pressures have been substantial,” Rothman said. “So you'd rather not sell the room, have a few percentage points fewer rooms, but charge a higher rate in an effort to protect your profits.” 

Hotel owners should focus on cost containment at the property level to protect gross operating profits during a slow RevPAR growth environment, Rothman said, adding that could include maintaining guest satisfaction and being judicious with capital investments. 

Many analysts say business travel will never return to what it was prepandemic, but it, too, may find a new normal. While people are less likely to travel for a one-off meeting, companies with remote employees are more apt to arrange group travel to occasionally get teams together in person, Freitag said.

“The counter to people not being in the offices is that if our CEO still wants to build culture, he or she has to get people together,” Freitag said. “The easiest way to do that is in a hotel ballroom.” 

Group travel still lags 2019 levels as well, but it is expected to catch up within a year or two, CoStar reported. And higher percentages of group occupancy are also tied to higher RevPAR — hotels with 10% or less group occupancy have an average RevPAR of $173, while hotels with 50% or more group occupancy have an average RevPAR of $199.

Brands like Hilton hope the recovery of non-leisure travel will boost its demand. 

“I think you're going to continue to see business transient grind up,” Hilton's Nassetta said during the earnings call. “I do think next year we will likely surpass prior peaks of 2019 in terms of demand levels. So you will see increase in demand.” 

With group and business travel still recovering and leisure travel normalizing, the hotel industry remains in flux, Rothman said. Yet eventually, the relationship between the economy and the hotel industry will hit a new correlation coefficient, she said.

“But I don’t think we’re there yet, and I don’t think that it will return to the way it was, because people aren’t traveling the way they used to,” Rothman said. “It doesn’t mean they’re traveling less. Demand has fully recovered. They’re just traveling differently, to different places at different times for different reasons.”