CRE Trends & Challenges for the Hotels & Lodging Market
Travel is one of the largest and fastest-growing sectors in the world, and, perhaps unsurprisingly, the United States is a leading beneficiary of this growth. These numbers are driven largely by a strengthening global economy. A recent Deloitte report shows that the industry hit a record $353 billion in 2017, with 5% growth predicted for 2018. If on-track, the industry will hit a record-breaking $370 billion by the end of the year.
However, hotels are a property type where shifts in supply and demand are felt almost immediately. Read ahead to learn more about trends and challenges currently impacting the lodging market.
Trends Driving Demand for Hotels
Major cities nationwide are seeing growth that justifies hotel investments, and this success is flowing down into secondary markets as well. Further, younger generations are now prioritizing travel, with 47% of Millennials preferring to spend their money on traveling instead of buying a house. These trends, as well as the ones outlined below, all factor into the increasing demand for hotels and lodging.
A Healthy Economy
Factors such as the rise of the middle class in many emerging markets, an increase in disposable incomes, and more positive attitudes toward travel have enabled this industry to grow and flourish. In the United States, low inflation and unemployment, increasing incomes, and a robust stock market are elevating consumer confidence and are expected to stimulate spending.
Shift from Products to Experiences
The industry is undergoing and being forced to adjust to shifting consumer expectations. A 2018 report from Deloitte claims that “travel is outpacing demand for goods … experiential spending on recreation, travel, and eating is trending up”. Millennials are particularly susceptible to this trend, driven strongly by FOMO from seeing their peers’ social media posts. In fact, 52% of this generational cohort indicate that social media posts are a consideration for their travel plans, a phenomenon sometimes referred to as “ego travel”. But this is not just a trend for the young – even 15% of Baby Boomers claim to post vacation photos on social media to make their network envious. In response to this trend, hotels are shifting away from merely providing accommodations to now creating memorable and even customizable experiences for guests.
Lower Barriers to Travel
Historically, travel was a luxury reserved for only the privileged. Now, falling costs and an increasing number of affordable options has put travel within reach of many more people. Laxer restrictions on travel visas have also eased the flow of tourists across borders.
Challenges Affecting Hotel Demand
Despite these positive indicators, there are several issues negatively impacting hotel demand and the industry’s ability to adapt to market conditions.
Currently, demand for hotels is outpacing supply, but the lack of adequate infrastructure is causing bottle necks. Even as hotels are being built, infrastructure needs such as airport and border control upgrades, road and mass transit expansion, and communication technology development are lagging behind. When accessibility is not easy and seamless, tourists are likely to choose an alternate destination, affecting demand in the long-run. Thus, having adequate travel infrastructure plays a big role in tourism competitiveness. Locations must have the infrastructure in place to meet current demand, as well as plans and prioritization to continue investment and meet growth needs.
Natural disasters pose a challenge to maintaining infrastructure, from hurricanes, tornadoes, and earthquakes to wildfires and volcanoes. Hotels, in particular, are susceptible to risk, both physically (due to property damage) and economically (due to lost business from tourists avoiding the disaster-ridden area). Fortunately, most areas see a strong rebound once the threat is perceived to have been remedied or removed, but the length of the recovery period is dependent on several factors, including type of destination, type of disaster event, and scale of destruction.
Short-term rentals, such as Airbnb, have exploded in popularity and are revolutionizing the lodging market. But they are also decreasing the pricing power of hotels, sometimes referred to as “the Airbnb Effect”. According to Forbes, “Airbnb offers listings in 191 countries, and its total number of listings – 4 million – is higher than the top five major hotel brands combined”. The nature of alternative lodging also puts hosts in a unique position where they can respond quickly to market conditions and choose when they want to participate in the market, i.e. keep their homes for private use when prices are low and open them up to travelers when demand is high. The challenge that hotels face is building enough capacity to satisfy peaks but not so much capacity that they have low occupancy the rest of the time. In order to keep their properties full and compete with the private accommodation market, hotels must offer attractive rates, but this strategy ultimately affects revenue.
Pressure to Innovate
When “run-of-the-mill” experiences just won’t cut it anymore, hotels must come up with unique experiences, services, and offerings for guests. Now, travelers are looking for boutique-style accommodations with a local feel reflective of the neighborhood and community – curated properties that offer up that “wow” factor. Trends such as “glamping” demonstrate travelers’ desires for a culturally-rich experience and reinforce the appeal and popularity of homeshare properties. As such, hotels need to change their strategies in order to remain competitive. Many hotels have already jumped on the “boutique” train, but some are now considering residential design, which allows tourists to feel at home … even when they are on the road, indicating a shift away from the more sterile, manufactured designs. Again, the residential design factor contributes to the appeal of a homestay-style accommodation. Further, the 21st-century traveler doesn’t want to spend time cooped up in their guest room but rather in a communal space where they can socialize with fellow peers and travelers.
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