The hotel industry is nothing if not resilient. It survived COVID; it can take on anything. The current landscape presents its challenges: it’s tough on developers, wracked by higher interest rates and elevated construction costs, and on a transaction market where a persistent gap exists between what buyers are willing to pay and what sellers expect to receive.
Despite those pressures, Robbie Karver, a principal at EY, whose specialty is real estate, hospitality, travel and tourism, is a believer and optimism. He sees an industry with considerable momentum—and one whose fundamentals remain stronger than many of the headlines might suggest.
“There’s a lot of tailwinds right now in the hospitality space,” Karver said, pointing to the three primary sources of hotel demand: leisure, group and corporate travel.
Corporate and group demand, he said, are benefiting from relatively strong corporate performance, with companies continuing to invest in meetings, events and business travel, which is a multiplier for the hotel industry. Leisure demand has also remained resilient, as consumers continue to prioritize travel and allocate discretionary income toward it.
Highly Rated
One of the bigger surprises of the post-pandemic period has been the durability of hotel rates. After the surge in pricing that followed the pandemic, there were widespread expectations that ADR would eventually retreat. It’s been anything but, especially in the luxury category, where travelers are showing little pushback against higher rates.
“People were worried that post-2022, you were going to see a sharp decrease in rate,” Karver said. “That hasn’t happened.”
Instead, rates have generally plateaued or continued to increase at or slightly above inflation, he said, giving owners and operators the confidence and assurance that they can renovate or reposition properties and push ADR without necessarily sacrificing occupancy.
That dynamic is helping fuel transaction activity. Buyers are pursuing a broad range of assets, from stabilized hotels to properties that value-add opportunities for renovation, repositioning and higher rates.
At the same time, the cost of building new hotels has made acquiring existing properties increasingly attractive.
“The replacement cost of hotels is really high right now,” Karver said. Higher labor and material costs have made new development difficult to pencil, creating an incentive for investors to acquire properties that can either operate as-is or be renovated.
That is particularly evident in the limited-service, select-service and extended-stay segments, where hotel companies have worked to develop products that can be built at more manageable costs. Karver said some new extended-stay products can be developed for roughly $125,000 to $175,000 per key.
The equation becomes considerably more challenging the higher the chain scale, with luxury projects costing more than $1 million per key. Higher bond yields, stubborn inflation and resultant higher interest rates have made it more difficult to underwrite ground-up development.
“A 5% interest versus a 6.5% interest on $1 million a key is a deal killer,” Karver said.
As a result, some projects are being delayed rather than abandoned. In one example, Karver pointed to a Miami project that has been on hold for several years because financing costs make redevelopment difficult, while the existing property continues to perform.
“If the property’s performing, no one’s complaining,” he said.
What’s The Ask?
That same dynamic is contributing to a stubborn bid-ask gap in the transaction market. Karver said there is still roughly a 10% difference between what buyers are willing to pay and what some sellers expect. The fundamental issue is that many owners are not under enough pressure to sell.
“There’s still a healthy bid-ask gap,” he said. “We have all this dry capital. Our investors want to be in hospitality. They want to be in real estate.”
But financing costs remain an obstacle. Karver said buyers may need interest rates to fall by 100 to 200 basis points to make it easier to offer sellers an additional 5% to 10% on pricing. The Federal Reserve lifting the benchmark interest rate 25 basis points earlier this month to a target range of 3.75% to 4.00% only makes it harder.
Banks, meanwhile, have largely allowed owners to extend existing loans rather than forcing sales or refinancing at unfavorable terms. That has reduced the urgency for sellers to accept lower valuations.
“If banks continue to extend. They don’t want to own real estate,” Karver said.
The result is a market in which deals are getting done, but potentially fewer than would occur if owners were under greater pressure to transact.
Brand Bloat
The development environment is also helping shape the evolution of hotel brands. Karver said there was significant “white space” in the hotel landscape five years ago, but much of it has now been targeted by major hotel companies launching new concepts, particularly in midscale, economy and extended-stay categories.
Those segments benefit from lower construction costs and relatively straightforward development economics.
The proliferation of brands has also given owners more options. Rather than choosing between operating independently and committing to a traditional full-service flag, owners can increasingly choose soft brands, licensing arrangements and strategic partnerships that provide access to distribution and loyalty programs while allowing greater flexibility. And example includes the partnership between Hilton and Yotel, which is ostensibly a franchise agreement that was inked in March.
Karver expects that trend to continue.
“I don’t think you’re going to see this tsunami of second- and third-generation hotel owners get out of the flags,” he said. “I think they’re just going to think about the flag partnerships a little bit different.”
Hotel companies are also extending their brands beyond traditional hotels. Karver sees opportunities in branded residences, outdoor lodging, RVs and other adjacent businesses where hotel companies can reach consumers who are already engaged with their loyalty ecosystems.
The logic is straightforward: If consumers are spending money outside the traditional hotel environment, hotel companies increasingly want a way to participate.
Looking ahead, Karver expects consolidation among hotel management and brand companies to continue, particularly as companies look for ways to become leaner and more attractive to consumers.
His broader outlook for the industry is decidedly positive. Despite the proliferation of brands and the industry’s headwinds, Karver said hotel fundamentals remain strong. New hotel supply continues to lag historical levels, and he does not expect construction to accelerate enough to dramatically close that gap.
“Demand will continue to be there,” he said. “Rates will continue to have the ability to go up and, absent any crazy supply growth, which I don’t think is coming, the hotel business will continue to be a strong business.”
AI Now
AI is another factor that could reinforce that trajectory, particularly in distribution and the booking experience. AI will ultimately make it easier for consumers to find and book hotels, according to Karver, and could give owners more opportunities to command higher rates by delivering a better overall experience.
“I think it’s only going to make the experience for consumers stronger,” he said.
While some hotel executives worry that AI-powered search could shift bookings toward OTAs rather than direct channels, Karver sees the hotel companies as better positioned than the intermediaries to adapt.
“The OTAs are the ones that should be worried about what’s happening in the AI space,” he said. “Owners are still the one with the product.”
For Karver, that product—and the industry’s ability to adapt it to changing consumer preferences—remains the central reason for optimism. The hotel industry has faced predictions of an impending reckoning before, he noted, yet it has repeatedly adjusted.
The next phase may involve fewer new hotels, more conversions and renovations, greater flexibility in brand relationships and increasingly sophisticated ways of reaching consumers. But with demand holding up and supply constrained by economics, Karver sees the fundamental equation remaining favorable.