Hospitality industry stability for growth and success: PwC

Most subsectors of the US and global hospitality industries are expected to maintain growth at current levels through 2024 and at least part of 2025, with near-term prospects restrained. This was the consensus at the 46th Annual NYU International Hospitality Industry Investment Conference, aligning closely with PwC’s analysis.

But stability does not mean stagnation. While last year’s conference attendees were preoccupied with short-term uncertainties, the current consensus offers a clearer view of the immediate future. This year’s discussions shifted to balancing immediate resilience strategies with long-term planning. When projecting 10, 20 and even 50 years ahead, hospitality leaders are notably optimistic.

There are five key areas of innovation, evolution and concern that hotel industry leaders and investors are focusing on through 2025 and beyond.

1. Economic uncertainties affect hotel performance

Leisure demand growth for US hotels has moderated, largely due to economic factors. A strong US dollar incentivizes domestic travelers to go abroad while reducing inbound traffic, causing the US market share of global travel to decline.

PwC’s Hospitality Directions report shows how room-rate growth, which initially drove the post-COVID recovery for US hotels, softened from Q2 2023 through Q1 2024. The increasing appeal of short-term rentals continues to moderate demand for hotel stays. Individual business and group demand are improving but not enough to offset reduced leisure demand. This weakness is evident across each hotel tier — upscale, midscale and economy — mainly due to inflation. While occupancy levels have declined year over year for the last four quarters, we still expect incremental improvements through 2024 and into Q1–Q2 2025.

Multiple factors are exerting downward pressure on room rates, and hoteliers face increased labor, supplies and insurance costs, necessitating leaner operations to protect their bottom lines.

Annual occupancy for US hotels is expected to rise marginally to 63.6% this year. With moderating occupancy growth, average daily room rates are projected to increase by 1.2% for the year, with revenue per available room (RevPAR) up 2.2%, reaching approximately 116% of pre-pandemic levels, on a nominal dollar basis.

The key takeaway? Hoteliers can’t afford complacency over the next 12 months. Most will need to consider how to drive operational efficiencies to build resilience. Low short-term growth and profitability now could lead to stronger returns by late 2025 and beyond.

2. Elections, tensions and longer-term travel trends impact hotel demand

Uncertainty can often reduce hotel demand in US presidential election years. Geopolitical tensions also affect airfares and travel and lodging demand in many world regions. In addition, two data-related macrotrends are causing industry-wide concern.

Air travel and lodging demand have largely aligned through changing economic times. While air travel has recovered to 2019 levels, hotel demand still lags. Hospitality leaders now believe that demand for flights has decoupled from demand for lodging.
Hospitality industry growth indicators appear to have decoupled from GDP growth in the US market.

If these trends persist, hospitality industry forecasting and enabling technologies may need to adapt rapidly to compensate.

3. Evolving guest preferences offer opportunities for business transformation

The pandemic amplified a shift toward valuing experiences over things. With food and beverage revenue down overall, now is an opportune time for hoteliers to reinvent their food and beverage approach as a loyalty and profitability engine. And with credit cards competing strongly with hotel and airline points systems and loyalty programs today, that shift is becoming more challenging.

Success for hotels lies in responding flexibly to the changing desires, needs and expectations of their guests.

Destination hotels: From ultra-luxury through midscale, guests expect hotels to be true destinations in themselves, not just gateways to a destination (city, region, tourist sites, etc.).
Experiential travel: Leisure travelers opting for travel over owning a home are seeking memorable experiences. Hotels need to offer meaningful experiences and distinctive food and beverage offerings to gain and maintain mindshare.
Lifestyle and wellness: Demand for lifestyle hotels and wellness travel experiences is growing so rapidly that they are becoming mainstream expectations rather than differentiators.

Hotels can drive efficiency and monetize assets by reducing costs in noncritical areas and investing in those that matter to guests now, things like spa-style exercise facilities, rooftop bars, flexible co-working suites.

“Guests are increasingly seeking unique, authentic experiences – and choosing hotels with that criterion top of mind.”

Jeanelle Johnson, Principal, Lead Client Partner, and Travel, Transportation and Hospitality Sector Co-Leader, PwC US

4. Workforce trends put a premium on fostering top talent

The US leisure and hospitality sector employs about 17 million people, over 10% of the American workforce. The sector remains an important magnet for recent-immigrant labor and an engine of upward mobility, and because hotel companies are still places where hourly employees can rise to the executive suite, hotels are engines of opportunity.

Today, labor costs are rising faster than total revenue for many companies and the industry. With unemployment persistently low, labor shortages are also exerting pressure on many firms, as churn impacts efficiency. Unionization can also increase costs in some markets. Many industry leaders agree that their only option is to raise pay to attract and keep top talent.

Authentic and effective diversity, equity and inclusion (DEI) initiatives can also help build a sustainable workforce. The hospitality industry’s value-based practice of welcoming guests extends organically and dynamically to staff. Diversity can drive innovation: A diverse workforce is poised to anticipate the needs of increasingly diverse customers.

Despite growing scrutiny of DEI programs, hospitality leaders remain committed to their initiatives — recognizing the critical connections among organizational values, workplace culture and business success.

5. A complex macroeconomic environment challenges new investment

The increased cost of capital is a major challenge for hospitality investors. Years of low interest rates have left the industry with atrophied financial reflexes. Future leaders who have only known near-zero interest rates and easy access to funding must learn from older leaders who navigated past crises.

Hospitality deals activity is low by historical standards and expected to remain suppressed into 2025. At the same time, there’s substantial debt “looking for a home,” and hotels are currently favored over commercial office real estate. Investors must focus on due diligence, creative debt structuring and the effective use of travel, revenue and performance data to inform strategy.

With new construction too expensive for some, investment strategies include:

Brand conversions and brand-driven property improvement plans
Owner-driven renovation/expansion
Conversion of non-hotel properties
Investing in hospitality technology

Older office or residential properties with amenable floorplans can be more attractive than new buildings. Yet investors still see two bright spots for new construction.

As in previous downturns, luxury projects remain big draws for capital now worldwide.
With federal legislation stimulating US manufacturing and construction, demand for extended stay facilities is surging. Insiders expect this trend to persist, and not only in the US. Some estimate the global extended-stay market at $300 billion.

Overall, informed investors see reasons for long-term optimism. Seller expectations are resetting to an 8% to 10% cap rate for hotels, and the investment environment is stabilizing.

“Rising costs of capital for hotel construction, as well as acquisitions, now make structuring hospitality deals a complex art. Engineering the credit stack can be a subtle balancing act. For many transactions, identifying the just-right debt tranche is the key, the “click.” Persistence, creativity and patience — deals are typically taking longer to complete — are absolutely essential.”

Abhi Jain, Principal, Hospitality and Real Estate, PwC US

Hospitality in the long term: The platinum age of travel?

Industry leaders identify two urgent priorities.

1. The entire global travel and lodging industry should prepare now for the next possible global pandemic. No company can afford to wait for government entities to require them to plan to protect their guests, staff and business.

2. In the United States, industry leaders should collaborate with federal agencies to bring international passenger travel and arrival processes in line with global leading practices.

These priorities are critical given the sector’s long-term prospects. In the next 10 to 20 years, 25% of global employment growth could come from travel and hospitality. While luxury and economy assets will likely remain profitable, the mid-market is likely to drive global growth for the next 50 years. Hospitality leaders and investors today are optimistic about a strong growth trajectory and long-term success.