RTO Boosts Business Travel, Puts A Dent In Domestic Leisure Traffic As Hotel Demand 'Normalizes'

Business travel is back big, but as Americans trickle back to the office, that gain has brought some pain on the leisure side, according to executives at some of the nation's largest hotel chains and hospitality REITs.

Across the board, hospitality executives projected confidence in the strength of business and group travel demand to investors during their latest round of quarterly earnings calls. But they were less certain about leisure trends, characterizing the first quarter as a return to normalcy after travelers flocked to resorts and urban centers in the wake of pandemic restrictions lifting worldwide.

Leisure demand was roughly flat or down year-over-year for a majority of hospitality companies in the quarter, a slowdown largely attributed to poor weather, the Easter holiday falling earlier in the year than usual and greater numbers of workers doing business at the office rather than at home or on the go.

“We believed and expected that the leisure markets would soften as you started to see people finally getting back into the office and working and eventually transitioning that leisure-oriented travel to be more business travel,” Dennis Craven, chief operating officer at Chatham Lodging Trust, said during the company’s earnings call May 6. “That's essentially what we saw.”

Executives' observations were in line with a Q1 JLL report finding that “U.S. hotel performance is normalizing” from spikes in 2022 and 2023 driven by pent-up demand. But pricier average daily rates due to limited new hotel growth saw revenue per available room, a key industry metric, rising nearly 14% over pre-pandemic levels in 2019, according to JLL.

While Marriott International’s leisure RevPAR in the U.S. and Canada was flat compared to Q1 2023, its global holdings buoyed its overall leisure RevPAR, company president and CEO Tony Capuano said on the company’s earnings call May 1. Marriott’s leisure RevPar was up 4% year-over-year, its group RevPAR rose 6% globally and its business RevPar was up 1%. 

Capuano said he was encouraged by the strength of domestic group and business travel, buoyed by strong trade with big corporations. Large corporate business with Marriott’s top 100 accounts enjoyed the strongest consecutive improvement it has seen in the last eight quarters, Capuano said.   

“Throw all of that in the blender, and it does feel a little more like settling into a more normalized pattern versus a really systemic falling off the cliff,” Capuano said. 

Hilton Worldwide CEO Chris Nassetta agreed that leisure was normalizing from “super high levels” and Hilton had “tough” year-over-year comparisons in that area. Yet leisure RevPAR still exceeded the company’s expectations given “continued strength in international markets and holiday shifts,” he said during the company’s April 24 earnings call.

Even so, demand for leisure travel is not evenly divided between urban and resort properties, with travelers preferring big city vacations in the first part of the year.

RLJ Lodging Trust reported healthy leisure demand, pointing to a 2% increase in revenue during the first quarter, driven primarily by the strength of urban leisure, which increased by 3%.

A “robust volume of social events” such as concerts and sporting events continues to bolster demand for urban getaways, Leslie Hale, president and CEO of RLJ Lodging Trust, said on its earnings call May 2.

Hale said urban leisure for the company remains healthy, given its footprint and the demand dynamics. Breaking down leisure further into rate versus demand, Hale said she expected resorts would pull back from rate peaks, but urban leisure rates would stay at or near peak.

“Leisure still continues to be a tale of two cities,” Hale said.  

This lines up with figures from Pebblebrook Hotel Trust, which saw its urban properties increase RevPAR by almost 5% year-over-year, offsetting a 4.4% decline in RevPAR across the company’s resort portfolio.

Weekday occupancy for Pebblebrook’s properties improved 3 points year-over-year, demonstrating the continued recovery of business travel, Pebblebrook CEO Jon Bortz said during its earnings call April 24.

“Business transient travel continues to recover and it's noticeable,” Bortz said. “It's represented in the stronger weekday occupancy numbers.” 

On the mergers and acquisitions front, Hilton Worldwide struck the quarter’s largest agreement when it announced in March that it would pay $210M to acquire all rights to the Graduate Hotels brand. Graduate has over 30 hotels in university-anchored towns and will give the hotelier an opportunity to serve guests in markets where it previously lacked a presence, Nassetta said. 

A far larger proposed deal fell through in March when Choice Hotels International gave up on its $8B bid for a hostile takeover of Wyndham Hotels & Resorts. The lengthy pursuit began in April 2023 and ended after Choice said it didn’t see a reasonable path to acquiring Wyndham due to its “refusal to constructively and substantively engage on terms.” 

Wyndham Chief Financial Officer Michele Allen said costs related to Choice’s failed takeover of the company will tally about $50M in total. 

Since the failed takeover, Wyndham CEO Geoff Ballotti said the company is seeing less uncertainty from members of the development community who were reluctant to engage while Choice was in hot pursuit. Ballotti pointed to the company’s 11 hotel conversions under the newly created WaterWalk Extended Stay by Wyndham brand in the quarter as evidence of improved sentiment.

“With the deal noise dissipating, owners who were uncertain on committing to deals with us, those who did not want to wind up in the Choice system, have agreed to sign,” Ballotti said. “The pause, if there was one out there, has reversed.”  

Four hospitality companies — Wyndham, Choice, Marriott and Pebblebrook — also decided to allocate capital toward buying back some of their own stock, financing it through a variety of means and for different reasons. 

Bortz said Pebblebrook has been buying back its stock instead of investing in additional resort or urban properties because the company likes its current portfolio mix and wants to own a greater percentage of assets under its flag. 

Wyndham bought back $57M of shares in Q1, and its board increased its repurchase authorization by $400M. Allen said the company believes its stock is significantly undervalued at the current trading levels, representing a compelling investment opportunity.

Q1 was a period of recovery for some REITs, including Host Hotels & Resorts, which suffered substantial fallout from the August 2023 Maui wildfires. The impact is still hitting Host's bottom line, with an estimated decline of 310 basis points in first-quarter RevPAR, factoring in previous growth projections.

The company has three resorts on Maui and is still working through the “evolving nature” of demand on the island, said Jim Risoleo, Host CEO and executive director. 

Air capacity to the island is still down and consistent with where it was in the aftermath of the fires last year, Risoleo said. 

“When the wildfires occurred, devastating wildfires occurred, those folks who might have been new to Maui … they listened to the governor, and the governor said, ‘Stay away from Maui,’” Risoleo said. “Travelers took the governor at his word.”

Those warnings have now been tempered, and Maui hotel owners are working together to put a marketing plan in place, he added.

“We've got to get people back to the island,” Risoleo said. “We have to sell the beauty of Maui and the experiences that they can get.”  

Natural disasters aside, hotel operators are also hoping to recover from an economic environment some fear could stall travel momentum.

Hale said she was concerned about the impact the Federal Reserve may have on slowing the economy, though she has yet to see an impact in the numbers and trends she’s analyzing today. 

“The fact of the matter is the Fed is trying to slow the economy,” Hale said. “We see that reflected in the lower end of the consumer spectrum, whether it's in the form of their spending, their credit and/or what's happening in the economy sector for hotels. If the Fed is successful in slowing the economy, travel will not be immune to the impact of that.”