U.S. RevPAR Growth To Align With GDP And Real Consumer Spending

We expect U.S. RevPAR growth will moderate in 2024 to around 2%-4% from approximately 5% in 2023 as its growth rate aligns with GDP and real consumer spending, which S&P Global economists forecast will grow 2.4% and 2.1%, respectively. While the industry-wide recovery from the COVID-19 pandemic wanes, we believe upper upscale urban hotels will continue to benefit from group strength and a continued return of business and international travel. In contrast, leisure-oriented operators and resorts could face stronger headwinds as consumers absorb multiple years of high inflation and the stockpile of pent-up savings has declined.

Ratings across the U.S. lodging sector have recovered from pandemic lows, and most outlooks are stable. U.S. RevPAR in the fourth quarter of 2023 remained 14% above fourth-quarter 2019 levels. Average daily rate (ADR) increased approximately 20%, while occupancy remains 4% below the comparable pre-pandemic period. We expect financial policy decisions regarding mergers and acquisitions (M&A) and shareholder returns will be the biggest factor in ratings upgrades and downgrades in 2024.

Table 1

Group And Business Transient Travel Will Drive RevPAR Growth

Strong group travel and still-recovering business transient demand will promote ADR stability and modest occupancy growth for full service upper-upscale hotels in 2024. The full service upper upscale segment--which include a higher concentration of hotels that cater to business transient travelers and large conventions--have outpaced the broader lodging industry for the past year, supported by both occupancy and ADR gains. For the same reasons, urban markets such as Washington D.C., New York, Las Vegas, and Boston experienced the highest RevPAR growth in 2023. We expect the divergence between business and leisure-oriented hotels will continue for the next several quarters because leisure travel has more than fully recovered and businesses--which tend to be less price sensitive than leisure travelers--continue their efforts to get back on the road to promote in-person meetings. Additionally, these hotels can negotiate higher rates for group travel several months in advance, adding revenue visibility.

Chart 1

Chart 2

Leisure Travel Surge Has Peaked And Demand For Economy Segment Hotels Stabilizes

While vacationers remained more resilient than we previously expected, we believe a decline in savings built up during the pandemic could lead to tightened personal travel budgets. As a result, consumers could search for deals or pull back on travel spending altogether as they prioritize nondiscretionary purchases. This could pressure average daily rates and occupancy in some leisure markets in 2024.

Furthermore, we believe that lower income consumers, who are less able to weather persistently high prices, are beginning to pull back on travel spending. We typically assume in a weaker economic environment that economy and midscale hotels benefit from travelers trading down. However, economy and midscale hotels experienced significant drops in occupancy in the second half of 2023 following a surge the prior year, and did not experience concurrent declines in ADR.

For now, we expect economy and midscale hotel operators will accept the trade-off of losing a handful of room nights in order to preserve lean staffing levels and good hotel profitability. However, we expect that a sustained or steep pullback in demand could force operators to decrease rates to fill rooms.

Chart 3

Hotel Profit To Decline Moderately

We expect EBITDA margins among our rated lodging REITS (Host Hotels & Resorts Inc., Park Hotels & Resorts Inc., Xenia Hotels & Resorts Inc., RLJ Lodging Trust, and Ryman Hospitality Properties Inc.) will decline in 2024 as margins continue to moderate from record levels experienced in 2022. Owners bear the cost of operations and maintenance of the hotels, and we expect wage growth and increased property and insurance costs will outpace RevPAR in 2024.

Additionally, as the companies undergo significant capital improvements at certain resorts, such as the room renovations at Parks Hawaii properties and Xenia's large scale renovation of its Hyatt Regency Scottsdale property, margins will further be impacted by lost room nights available. Meanwhile, we expect margins for managers and franchisors to remain relatively stable given the lower and more variable cost base of the business model and RevPAR stability.

Macroeconomic Considerations And Our Downside Scenario

In February, S&P Global economists upwardly revised their forecast for U.S. GDP to 2.4% from 1.5% and consumer spending to 2.1% from 1.8%, given strength in the labor market despite significant increases to the Fed's policy rate since early 2022. Nonetheless, our economists expect a moderate increase to unemployment over the next two years to approximately 4.3% in 2025.

Lower inflation, together with persistent strength in the labor market, have contributed to renewed consumer optimism. The University of Michigan's consumer sentiment improved further in January to 78.8, its highest level in the past two and half years, from 69.7 in December. However, we expect consumer spending will become more aligned with real income growth, which has been muted over the past year.

Our downside scenario considers an unexpected decline in consumer spending as travelers contend with lower savings levels and higher costs for necessary purchases. In such a scenario, we believe that the U.S. could inch closer to a recession, leading businesses and consumers alike to pull back on discretionary travel and a low- to mid-single-digit percent decline in U.S. RevPAR in 2024. We believe industry-wide occupancy would fall from already depressed levels, as travelers trade down chain scales and hotels may lower their rate to entice guests. Additionally, given higher labor costs and increased real estate taxes, insurance premiums, and other operating costs, we expect margins would decline more meaningfully, putting pressure on our base-case forecasts for leverage and cash flow.

Transactions And M&A Could Increase Leverage For Aggressive Issuers

Although there is still a substantial gap in bid-ask spreads for hotel real estate, and the buyer pool reportedly remains smaller than normal, some deals are getting done despite higher rates. Also, the hotel sector remains fragmented, cyclical, and highly competitive, which leads to potential consolidation opportunities.

Companies that currently have cushion in leverage measures may use it up doing deals. Mergers and acquisitions (M&A) potential is also present in the branded hotel space. Choice Hotels International Inc.'s bid for Wyndham Hotels & Resorts Inc. is one example of a potentially highly leveraging transaction, although Choice has withdrawn its proposed acquisition. Additionally, a number of our rated REITs discussed the potential for additional hotel acquisitions if the capital markets improve in 2024 following multiple years in which many owners were net sellers of assets.

Diversification Of Rooms Base Will Determine Performance In 2024

In 2024, we expect performance in upper upscale and upscale hotels and resorts will outperform the broader market and will increase overall U.S. RevPAR growth as they remain the last segments to recover from the pandemic. Additionally, we expect companies with international exposure (specifically to the Asia-Pacific region), or those that draw a significant percentage of rooms nights from foreign travelers to fair better than wholly domestic portfolios.

Appendix

Chart 4

Chart 5

Chart 6

Chart 7

Chart 8

Chart 9

Chart 10

Chart 11

Chart 12

Chart 13

Chart 14

Chart 15

Chart 16

Chart 17