NEW YORK — Keith Barr, the outgoing CEO of InterContinental Hotels Group, offered one more astute observation before exiting the stage. “We had the most headwinds in COVID, but now have the most tailwinds,” he told the audience, here at the NYU International Hospitality Industry Investment Conference at the Marriott Marquis.
Barr might be checking out of the chief role at IHG, but he still has the pulse on what is driving the hotel industry, one that was shared by fellow hotel CEOs speaking on a morning panel. “Travel has come roaring back,” said Tony Capuano, CEO of Marriott International. “We don’t see a slow down.”
The hotel industry was battered by COVID, but the aftermath has been a vigorous snapback, bolstered by a supply and demand mix that has resulted in strong hotel performance. On the demand side, travelers, especially leisure travelers, have flocked to hotels in what Barr said was no longer discretionary spend, but “the last thing consumers want to give up.” At the same time, new supply growth is at an all-time low due, in part, to the lull in construction during COVID and after with the exorbitant cost to finance.
Supply growth historically grows around 2% annually. It’s around 0.4% now, said Hilton CEO Chris Nassetta. “We have no capacity issues,” he said, and when you layer in financing for new construction and the lengthening of the construction cycle, “supply doesn’t change overnight,” Capuano added.
Low supply growth, which Leslie Hale, CEO of RLJ Lodging Trust, called “music to my ears as an owner,” mixed with high demand has given hoteliers the cover needed to push average daily rates to new highs. “Rates are through the roof and staying there,” said Sébastien Bazin, CEO of Accor. “The future never has been as strong—stronger than pre-pandemic, even.”
Consider Paris prices. Bazin said hotels there are up 50% over 2019. He added that in the ultra-luxury space, price is no obstacle for customers. The problem is “we don’t have enough suites” Bazin said.
Added Barr, “We haven’t reached a rate ceiling yet. In fact, he said, pricing is where it should be. “We have now caught up.”
A similar sentiment was shared by Mark Hoplamazian, CEO of Hyatt Hotels Corp., who noted that though rates might seem “crazy,” over an eight-year span and compound growth rate, “it’s not that high.”
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“We have been living in a COVID bizarro world,” admitted Nassetta, in what he referred to as a reversion to the mean, especially with regard to how the Federal Reserve is handling the economy. “Demand patterns will normalize by the end of the year,” he said. “It will look pre-COVID.”
Hoplamazian predicted strong demand patterns going forward, but not the same across the entire travel spectrum. He alluded to families with total household income above $100,000 expected to spend 10% or more on summer travel this year. Income levels below that were less. “If there is a recession, we will start to see some segmentation of who is out on the road.”
One of the unknowns that should become less nebulous as the year carries forward is China. A bright spot in the early days of COVID, its zero-COVID policy quickly reversed course, shutting the country of nearly 1.5 billion people off from the rest of the world.
“China,” Nassetta said, “is a year behind us.”
There, travel has been mainly domestic, with little to no inbound or outbound due to air lift. Consider a city like Shanghai, traditionally a huge source of inbound travel. “It will take some time,” Nassetta said, with expectations of further outbound China travel coming in the second half of the year. Some 200 million Chinese travelers came to the U.S. in 2019.
Bazin was even more bullish on India as a source market for hotels. “India alone has a 500-million person emerging middle class,” he said. “Watch out.”
NEW BRANDS
Three on the panel—Capuano, Nassetta and Hoplamazian—all recently launched new brands in the midscale extended-stay space.
Calling it a $300-billion market, “There is enough for all of us,” Nassetta said.
Extended-stay has hit it out of the ballpark during and after the pandemic as the workplace changes, with reduced office footprints and the workforce becomes more mobile than ever before. Hilton’s new offering, called Project H3 currently, will be very hybrid—two-thirds apartment style and one-third normal hotel. Expect similar for Marriott’s new Project MidX Studios and Hyatt Studios.
“It’s a high-margin business,” Nassetta said—”cheap to operate.”
He noted that the brand grew out of the success of Home2 Suites, an upper-midscale extended-stay brand from Hilton that “grew up” and became more expensive. “Now we have a lower price point,” Nassetta said.
“This space of midscale and extended stay, it’s ripe for development and a byproduct of the pandemic and working remotely,” Capuano said.