U.S. Hotel Performance: Luxury Hotels Rise as Low-End Slumps

26.06.2024 - 09:31 / skift.com / Jan Freitag / Sean Oneill

Luxury hotels in the U.S. have recently experienced robust growth in demand and room rates, while economy hotels have declined year-over-year. The numbers for the first five months of the year suggest a break with broad historical patterns.

“We’re seeing a bifurcation by hotel class,” said Jan Freitag, national director, hospitality analytics, at CoStar Group. “The higher-end traveler and, therefore, the higher-end hotels are showing robust growth in demand and room rate. But the same cannot be said for the lower end of the market.”

Here are the year-over-year trends for the first five months of the year, according to CoStar:

This divergence breaks a long-standing pattern in the hotel industry. Typically, room demand across all segments tends to move broadly in tandem with GDP growth. The current split suggests that today’s economic pressures are impacting consumers differently across income levels.

“That roughly 5 percentage point swing is arguably quite unusual compared with historical trends since the 1970s,” Freitag said.

Strength in the luxury segment might be chalked up to a “wealth effect” from a recent sharp run-up in stock prices and increased home values, which makes affluent travelers feel more comfortable spending on luxury hotels.

Meanwhile, high inflation for core things for lower-income households, like housing, food, and car payments, may force them to prioritize essential expenses over discretionary travel.

“When you are a consumer in a household with a sub-$75,000 income, you feel the pinch,” Freitag explained. “There are things you have to have, and then there are things you want to have.”

The trend is particularly noteworthy given that it follows a period of strong performance in the economy sector, partly driven by pandemic-era stimulus payments. “We are basically just coming back down to normal,” Freitag noted. “But because GDP continues to grow, you would expect more growth in hotel spending than the deceleration we’re seeing at the lower end.”

While the national trends for luxury hotels and economy hotels are clear, there are local variations and exceptions. Markets that grew extraordinarily after the pandemic, such as Tampa and Miami, are now experiencing flattening demand even in the luxury segment.

The trends may change, too, if overall performance improves in the second half of the year with predicted cuts in interest rates supporting economic growth.

CBRE’s latest forecast projects a 3% increase in revenue-per-available room on average for the rest of the year, driven by international tourists, summer travel, and limited supply growth. If it materializes, that performance would be above the weaker-than-expected first quarter but below 2019 after adjusting for inflation.