Leisure Travelers Spur Hotel Recovery, But Recession Threat Looms

Business travel might still be a shadow of its pre-pandemic self, but that hasn't kept hospitality from enjoying a fairly strong recovery this year, and going into the Labor Day weekend, leisure travelers are poised to continue to support the revived industry.

Still, with a recession looming, hotels aren't guaranteed a continued recovery.

"A recession is on everyone's radar right now," JLL Managing Director, National Practice Lead-Hotels & Hospitality Charlotte Kang said. "Especially with the interest rates rising and inflation high."

It isn't clear yet how deep a recession might be, or whether it will be enough to put the brakes on the pent-up leisure travel demand. After all, the various economic upsets so far this year haven't deterred leisure travel, making for an unusual hospitality industry recovery.

"In the past hotel market downturns, revenue recovery has generally been led by occupancy and demand returning first, followed by room rate growth," Kang said. 

"This time around is different," she said. "The recovery has been led by room rate growth because of the strong personal wealth accumulation and pent-up leisure demand, while business and group travel, although improving, are still lagging."

In short, people who want to travel, and can pay for it, are willing to pay higher rates to get rooms they want to stay in, Kang said. A mild recession, which could keep business travel at current lows, might not have much impact on leisure travel.

In the U.S., leisure travel historically makes up about 55% of demand for hotels, with business travel about 30% and meeting or group travel the rest, according to CBRE. Right now, leisure travel is about 70% of demand, while business travel is less than 20%. 

The pandemic's toll on hospitality, at least, seems to be mostly over. According to an early 2022 poll conducted by data and analytics company GlobalData, 57% of respondents are unconcerned about the further spread of Covid-19, thus setting the stage for an uptick in leisure travel and hotel occupancy this summer.

Some travelers even responded by increasing their travel budgets this year, according to GlobalData travel and tourism analyst Hannah Free, with travelers determined to make up for lost time, she said.

A separate GlobalData poll this year found that 28% of respondents had travel budgets that were higher than before the pandemic. 

The upshot has been stronger metrics for the hotel industry this year, almost as strong as in 2019.

As of July, U.S. hotel occupancy came in at 69.6%, down 5.4 percentage points from June 2019, according to hotel data specialist STR. 

The average daily rate nationwide was $159.08, however, up 17.5% compared with three years ago, and revenue per available room , or RevPAR, was $110.73, an all-time nominal high for that metric, while occupancy was the second-highest since August 2019.

There has been some improvement in business travel, but no recovery to pre-pandemic levels yet anywhere in the world, and — even barring a similar crisis — full recovery won't be for a few more years, according to a July survey by the Global Business Travel Association. 

Sentiment around the return of business travel is positive, according to a July GBTA survey, but macroeconomic and geopolitical issues are a new area of concern, replacing Covid-19.

“To understand the headwinds that have been impacting a more accelerated recovery for global business travel, all you have to do is look at the news headlines since the beginning of 2022," GBTA CEO Suzanne Neufang said. "The forecasted result is that we’ll get close, but we won’t reach and exceed 2019’s pre-pandemic levels until 2026."

A resurgence of travel spurred hotel profits in Q2 2022, meaning that some hospitality REITs earned a profit for the first time since 2019.

For their part, Americans plan to end the summer travel season with a bang, according to a poll by travel specialist Vacationer. More than 53% of U.S. adults intend to travel for Labor Day this year. 

Regardless of the overall surge in leisure travel, some hotel markets are doing better than others. As of July, Oahu, Hawaii, experienced the highest occupancy level among major U.S. hotel markets at 86.3%, though that was down 2.1 percentage points from 2019, STR reports.

By contrast, San Francisco reported the steepest decline in occupancy of any of the top U.S. hotel markets when compared with 2019, down 16.2%, a reflection of the continuing dearth of travelers coming to the U.S. from East Asia.

But even San Francisco has seen some recovery in visitor numbers. The city anticipates 21.5 million visitors in 2022 compared to 17 million last year, but down 30.2% compared to 2019. 

"San Francisco will not see a full recovery until travelers from Asia return and business travel and group business increases,” San Francisco Travel President and CEO Joe D’Alessandro said. 

The hotel recovery isn't just confined to the United States, but also has been seen in places that Americans travel to or can travel to, considering that some countries have been more open than others throughout the pandemic. As international travel among Americans continues to return, that will affect U.S. room rates.

More worldwide destinations are opening their borders now, providing options that were previously unavailable, Kang said.

"This will alleviate the pent-up leisure demand domestically and ease the upward pressure on room rate, which means demand will need to outpace its current growth to backfill the potential revenue gap," Kang said.

"Still, these factors will affect assets and markets differently and at varying degrees," Kang said. "It's important to understand the demand drivers in a particular market and for a particular asset."