Hotel CEOs: High Rates Are the New Normal, Haven’t Peaked

Resurgent post-pandemic demand has helped carve out a new normal in the hotel industry, with higher rate that hotel companies suggest have yet to peak, according to several hospitality CEOs this week duringthe annual NYU International Hospitality Industry Investment Conference in New York. And while conversations around a recession persist, signs of an economic downturn worth strapping in for do not, they said.

While leisure demand commanded the industry’s return from the pandemic, corporate demand is still returning and could begin to command a bigger piece of the pie.

“We’re on the road more now than we were probably in 2019,” said IHG Hotels & Resorts CEO Keith Barr, who is stepping down later this month. Business travel is being led by “reconnecting with customers and developers,” across the world, according to Barr. “It feels like the sustainability of demand in our sector is much, much more resilient,” he said. 

Effect on Pricing

Increasing corporate demand and blended leisure and business volume have emboldened hotel companies to name their price.

“It would be difficult to reinstate the price of a room,” Accor CEO Sébastien Bazin said. “For 20 years, we were not daring enough until the pandemic hit. … We can have actually new price economy being scaled by 15, 20 percent. And you know what? It holds,” he added. 

According to panelists, the level of pricing corporates are seeing today was there for the taking before, and it was just a natural progression and matter of time before hotels seized it.

“For years, owners were talking to us about, ‘Why can’t we see more average rate?’ I think we’ve just caught up to where we should have been over time,” Barr said. 

Rates during the past two years for the past generally have climbed, with analytics firms projecting slight increases ahead, but with some moderation. STR recently upgraded its forecast for 2023 revenue per available room and average daily rate to 3.5 percent and nearly 5 percent increases, respectively, ahead of 2022—which was a record-breaking year. 

And while there is “definitely going to be a ceiling,” as to how high these rates can climb, according to Barr, the industry “definitely” hasn’t hit it yet. Rates may seem high to corporates and consumers, but hotel companies see them as reflective of the industry’s current supply and growth. 

And while hotel occupancy levels haven’t fully and consistently recovered to pre-pandemic numbers—according to STR and other reports—rate hikes more than make up for it, seemingly creating a quality-over-quantity pricing environment.

The Not-So Recession

Talk around a recession has been bubbling, but conference panelists agreed it’s just that—talk.

“This has been the rolling recession. It’s the next quarter, then it’s the next quarter, [then] it’s next year,” Barr said, adding that the strength of consumer spending, the health of businesses’ balance sheets and current low unemployment in the U.S. suggests otherwise. The panelists also agreed that demand, leisure included, isn’t going anywhere. It may moderate at some point, but all signs lead to a new normal. 

According to panelists, consumers and corporates, when pushed, will cut back financially in other areas—not travel. A May 2023 survey from management consulting firm McKinsey noted 36 percent of U.S. respondents “intend to splurge” on travel this year, higher than any category other than restaurants and groceries. 

And the ongoing corporate rebound hasn’t fully incorporated the return of international travel from regions that are just now hitting their post-pandemic stride, including Greater China. Domestic travel in China in Q1 2023 was ahead of 2019 levels, and Hilton Worldwide CEO Christopher Nassetta expects the region’s outbound travel to rebound during the second half of the year.

“Ultimately, [they] want to see the world, just like everybody else wants to see the world. And that’s going to happen,” Nassetta said. “China was the largest outbound market pre-⁠Covid. I have every confidence that it will be the largest outbound market again.”