Hotel Owners See Demand ‘Firing On All Cylinders’ As Corporate Travel Finally Returns

Hotel owners and operators are clearing out the final debris from the pandemic-era truck that slammed into the industry.

Leisure travel came roaring back in 2021 and 2022 as the health crisis subsided and people booked long-awaited vacations, but the unanswered question that has given hotel executives anxiety over the last year is whether business travel would ever fully return to pre-coronavirus levels. The answer is now becoming clearer.

New financial data and commentary from the nation’s largest hoteliers over the last two weeks show the market’s business-related demand segments this year have reached or closely approached 2019 levels. This recovery drove several of the largest hotel owners and brands to report higher-than-expected earnings to begin 2023 and to increase their projections for the remainder of the year. 

“In the data in the first quarter, business travel has already recovered,” Hilton Worldwide CEO Chris Nassetta said on the company’s earnings call, responding to an analyst who asked if he thinks corporate demand will ever fully return. 

The two segments of the corporate travel landscape are group demand, including conventions and other events, and business transient demand, which consists of individual professionals traveling for meetings. Hilton executives said the $39B hotel giant has seen both segments return to pre-pandemic levels. 

Hilton’s business transient segment in the first quarter had a revenue per available room — a key metric of hotel performance — that was 4% higher than the first quarter of 2019, Nassetta said on the earnings call. And he said its group segment RevPAR outpaced 2019 by 5% in March and was roughly even with the pre-pandemic year for the full quarter. 

This recovery helped the hotel giant report $641M of earnings before interest, taxes, depreciation and amortization in the first quarter, up 43% from last year and exceeding the high end of the guidance range it previously gave analysts. Hilton has increased its guidance for the remainder of the year. Its stock price has risen more than 17% since the start of this year, outpacing the S&P 500’s 8% gain. 

“What's happened in the last three years has done nothing but reinforced … the need for people to be congregating to do the things that they do in culture and collaboration and innovation and all of those fun things,” Nassetta said. 

Marriott International, the world’s largest hotel chain, saw business transient revenues in the U.S. and Canada last quarter surpass their 2019 level for the first time since the start of the pandemic, CEO Anthony Capuano said on its Q1 earnings call. 

Host Hotels & Resorts, the largest hospitality REIT with a $12B market cap, has also benefited from booming business bookings. 

The REIT’s first-quarter EBITDA of $439M was 18% above the same quarter in 2019, a better-than-expected performance that CEO Jim Risoleo said was “driven by both occupancy increases and continued rate strength, particularly in the group business segment at our downtown hotels.”

“All of the segments are really firing on all cylinders,” Risoleo said. 

Host’s revenue from its group demand segment last quarter was up 7% from 2019, Risoleo said. Its best-performing markets for group demand compared to 2019 were Phoenix, San Diego and Miami. 

Business transient demand still hasn’t fully recovered to pre-Covid-19 levels in Host’s portfolio, but Risoleo said it has seen year-over-year growth, especially from small and midsized businesses. 

Citywide conventions, a key driver of demand for urban hotels, are still only generating about 83% of the room nights they did in 2019 for Host Hotels. But Host Chief Financial Officer Sourav Ghosh said he expected that would be the last demand segment to fully recover given the long-term planning schedule, and he is encouraged by bookings for citywide conventions in future years, especially in the Boston, Chicago and San Antonio markets. 

“If you think about a lot of the convention centers that were actually closed during the pandemic just in terms of sales staff gearing up and selling those cities, there is more of a ramp-up time,” Ghosh said. “It is coming back, but it’s just a matter of the entire sales staff getting all geared up and selling those cities. But so we do expect that to further ramp up with time.”

While some slices of demand aren’t fully recovered, Host’s performance last quarter exceeded expectations, and the REIT has increased its full-year revenue projections to nearly double its previous guidance. Its stock price is up 8.6% this year. 

Michael Bellisario, an analyst with Robert W. Baird & Co. who covers the publicly traded hotel companies, said his main takeaway from the first-quarter earnings season can be summed up in three words: “There’s no recession.”

“On-the-ground hotel fundamentals continue to be steady to better than expected,” Bellisario said. “Particularly the ramp-up in urban midweek business, although it’s still sluggish, is coming back, and group continues to be strong. First-quarter earnings were better than expected, and the near-term outlook is better than what it was 60 to 90 days ago.”

Bellisario said the biggest surprise last quarter was that hotel companies didn’t report any slowdown in bookings for near-term business trips, the type of expenses that are most likely to disappear as companies cut back. Hotel experts expressed concerns in December that corporate layoffs and recessionary fears would lead to a slowdown in business travel this year. 

“The short-term, corporate, off-site meetings with shorter booking windows are still occurring. That’s a good sign economically,” Bellisario said. “That would not be showing up if demand were weakening.”

The hotel companies did warn analysts there is still risk that a worsening economy could depress demand in the coming year.

“Further improvement will continue to depend on the broader macroeconomic environment, our ability to maintain high-rated business in resort markets, and the continued improvement of group, business transient and international inbound travel,” Host Hotels’ Ghosh said.

A survey of business executives conducted in February and March helps explain the strong corporate travel demand that owners are seeing. The survey from hotel services firm HVS of more than 350 business travelers found that 38% expected to attend more conventions this year than last year, and the same percentage expected to travel for more sales meetings. More than half of respondents said their travel budgets were increasing this year, with an average bump of 15%, while only 6% said they would decline. 

Business travelers are also extending their trips for more nights than they typically stayed pre-pandemic, the survey found. The vast majority of respondents said they are more likely to extend business trips to add recreation, leisure and travel with family and friends.

Multiple executives speaking at Bisnow’s Lodging Investment Summit in D.C. last month discussed this type of extended business travel demand, which has been coined “bleisure.” Wyndham Hotels & Resorts Chief Development Officer Chip Ohlsson said this has changed the days that hotels experience their busiest nights. 

“It's crazy, people think that all the business travelers stopped traveling,” Ohlsson said. “No, business travel just travels differently. That's all it is. A lot of times it's not Tuesday to Thursday, but ... it's Thursday through Monday now.”

New York City, a hotel market that captures strong business and leisure demand, has seen “remarkable progress” in all demand segments, Park Hotels & Resorts CEO Thomas Baltimore said on his REIT’s earnings call. He said the company experienced 113% year-over-year RevPAR growth in New York City last quarter, bringing it within 5% of pre-coronavirus levels. 

“New York is one where you think back to the middle of the pandemic and many naysayers out there [said] that New York would never come back and it would be 2027 or 2028 or some sort of silly logic like that,” he said. “The city is activated. People are going back to the office … you're seeing the city back, and no doubt, we feel very good about the outlook in New York.”

San Francisco, another market that has had executives concerned about whether it will fully recover, was the subject of questions by analysts on multiple earnings calls. The hotel CEOs pointed to positive signs in San Francisco, including a boost in demand from a major J.P. Morgan conference in January that Baltimore said “helped to drive meaningful rate increases across the city.”

But Bellisario said Park Hotels and Pebblebrook Hotel Trust, two REITs with large San Francisco presences, have suffered from the market’s slow recovery. 

“San Francisco is a big group and convention market, and because of all the stuff going on in the city, the exodus of tech workers, group [demand] has not recovered in San Francisco. It’s gone to Phoenix and San Diego and Denver and Vegas,” Bellisario said. “It’s sort of the perfect storm in San Francisco post-Covid.”

Roughly 15% of Park Hotels’ 2019 EBITDA came from the San Francisco market, Baltimore said, adding that he has been traveling to the market regularly given its importance to the REIT. 

“We have no doubt in our view that certainly San Francisco comes back,” Baltimore said. “It's not a matter of if, but when. I would say, given some of the recent reports, that probably is being extended a little.”

RLJ Lodging Trust, a $1.7B hotel REIT that has two-thirds of its portfolio in urban markets, reported RevPAR last quarter that was 95% of 2019 levels. It said those urban hotels experienced the strongest growth last quarter, especially from business travelers. Its business transient revenues last quarter were roughly 85% of 2019, and group revenues were nearly 100%, CEO Leslie Hale said. 

“Now obviously, we all know the million-dollar question is does [business transient travel] get back to 100% or not,” Hale said on the earnings call. “But what I would say is that we have confidence that the puts and takes between all the segments, and given the elevated rate growth that we're seeing across the portfolio and across the segments, is going to allow us to achieve our 2019 revenues across the portfolio.”