We expect U.S. RevPAR (revenue per available room) growth will moderate compared to our prior forecast to end 2024 flat to up 2% compared to 2023, representing a 200-basis-point (bp) decline at the midpoint from our initial expectations for the year. While S&P Global Ratings' forecast for U.S. gross domestic product (2.5%) and consumer spending (2.5%) remain relatively unchanged, normalizing travel trends and a strong dollar have contributed to weak leisure comparisons year over year. In contrast, group and business travel continue to outperform as businesses get back on the road, leading to relative strength in upscale and upper upscale hotels in urban markets.

Despite slower expected RevPAR growth, ratings outlooks across the U.S. lodging sector remain stable; however downside risks to our ratings could materialize if companies unexpectedly pursue aggressive mergers and acquisitions (M&A) and shareholder returns.

Table 1

Group And Business Travel Recovery Remains A Point Of Strength

Strong group and business travel continue to promote RevPAR growth among upscale and upper upscale resorts in urban markets. Through the first six months of 2024 large-scale conferences have returned to cities such as New York, Seattle, Boston, and Las Vegas as businesses continued to get back to normal. Meanwhile, typically sought after leisure destinations such as Nashville, Los Angeles, and Orlando have experienced RevPAR declines as leisure travelers pull back.

While we assumed a divergence between a moderation in leisure travel and relative strength in group and business travel in our forecast earlier this year, we now think it will be more pronounced, particularly the pullback in travel to leisure destinations. We expect the divergence between business and leisure-oriented hotels will continue for the next several quarters and that lower chain scales could fare worse if the macroeconomic environment deteriorates and concerns regarding unemployment increase.

Chart 1

Leisure Travel Has Begun To Soften

U.S. leisure travel has continued to return to normal as consumers have become more price sensitive due to a decline in savings, high hotel rates, and a cooling labor market. High-end consumers have opted to travel abroad given the continued strength of the dollar while lower-end consumers have begun to constrict travel budgets. Although further softening of the economy could lead higher-income travelers to tighten their travel budgets or search for deals, which could pressure room rates, we expect lower-income consumers will continue to be most affected and that weakness in the economy and midscale properties will persist through the second half of 2024. This could pressure economy and midscale hotels to reduce rates commensurate with the decline in occupancy, which they have been reluctant to do to preserve profitability. Typically, low-priced hotels benefit when high-end travelers become price conscious and trade down, and we will be watching closely to see if this pattern occurs later this year and into 2025.

Chart 2

A Modest Contraction In Profitability Is Likely

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 continue to decline in the second half of 2024, albeit at a slower pace than in the first half of the year, as margins begin to get back to normal from record levels experienced in 2022. REIT margins in 2022 reached record levels between approximately 25% and 32% as properties were able to increase room rates and demand surged once the economy reopened. However, beginning in 2023 margin started to flatten or modestly decline. We expect margins will broadly contract approximately 100-200 bps in 2024. Owners bear the cost of operations and maintenance of the hotels, and we expect wages, property taxes, and insurance costs will outpace RevPAR in 2024. Additionally, as the companies undergo significant capital investments at certain resorts, such as the room renovations at Park's Hawaii properties and Xenia's transformation of Hyatt Regency Scottsdale, margins will further be affected by the loss of available rooms. However, we expect that large redevelopment projects will increase profitability over time after reopening.

Macroeconomic Factors Remain A Key Risk To Our Base Case

The recent rise in unemployment has led S&P Global Ratings economists to alter their expectations. We still forecast rate cuts beginning in September, with a total of 125 basis points by year-end 2025, however the balance of risks tilt toward more of those cuts happening sooner rather than later. However, despite a cooling labor market and slowing GDP growth, we do not believe the U.S. economy is headed toward a recession. Nonetheless, the recent uptick in unemployment could put further pressure on lower priced hotels to reduce rates to fill properties. Though we expect economy and midscale hotels could benefit as consumers search for cheaper options.

If the expected decline in consumer spending as travelers contend with lower savings levels and higher costs for necessary purchases occurs, 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 modest 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 rates to attract 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.

Related Research

• U.S. Lodging Sector RevPAR Growth Will Moderate In 2024, March 13, 2024

Contributor: Nicolas De Diego