Forecasters Cut Outlook for Hotel Demand

06.06.2024 - 20:33 / skift.com / Sean Oneill / Amanda Hite

STR and Tourism Economics lowered their forecast for U.S. hotel demand growth this week. The benchmarking firms now project a more modest 2.1% increase in average daily rates this year — down from the previous estimate of 3.1%.

“Everyone in the hotel sector is saying we don’t have as much leisure [demand] on weekends,” said Amanda Hite, president of CoStar’s STR, during an interview at the NYU International Hospitality Industry Investment Conference.

While the industry remains cautiously optimistic about the remainder of the year, the recovery of lower-tier hotels hinges on the return of leisure travel and potential interest rate reductions.

CBRE, a real-estate consulting firm, also downgraded its forecast this week. It now predicts similar growth in the average hotel daily rate of only 2.4% in 2024.

A rise in the 2.1% to 2.4% range would be less than the 3.4% rise in inflation expected by 34 forecasters surveyed by the Federal Reserve Bank of Philadelphia. 

“The first months of the year broadly saw a moderation in demand across the hotel industry,” Hite said. “Some segments saw declines, and even in segments where demand grew, the growth was moderate.”

Lower-tier and mid-tier hotels saw more weakness than expected in the first quarter.

“Middle-income to lower-income consumers are feeling pinched by inflation, and some are cutting travel out,” Hite said. “If inflation keeps coming down, that will give them some relief, but I don’t think it’ll be enough until interest rates start to come down and make it cheaper for consumers to finance their credit card debt and loans.”

“The area for me that was surprising was the downward revision in the luxury segment,” Hite said.

The luxury segment faces greater risks due to a notable shift in the guest mix away from leisure travelers toward more group bookings and business travelers. Vacationers tend to spend more money on meals and services like spa treatments than business travelers.

“Rates will be under pressure there,” Hite said, “particularly if luxury hotels attempt to attract more leisure travelers on weekends by cutting rates.”

Hotel performance in 2024 may be tempered by many new hotels being scheduled for completion this year. Growing supply in short-term rentals and vacation rentals and the return of discounted cruise ship itineraries as a competitive travel offering may also cause supply competition for hotels, according to the CBRE report.

The U.S. annualized rate of economic growth has fallen from 4.8% to 3.4% to 1.3% over the past three quarters.

Reductions in interest rates could help alleviate some of the financial pressure on consumers, potentially boosting demand for lower-tier hotels.

If the Federal Reserve cuts interest rates, there is