HVS United States and Canada Hotel Industry: 2023 Recap and 2024 Outlook

United States

By Rod Clough, MAI , President - Americas

As 2023 ends, we look back on a year where hotel performance held steady, with occupancy closing out the year near 63% (vs. 66% in 2019) and ADR rising just under 5% to roughly $155 USD. Group room nights continued to show substantial growth, helping fill the gap left by some pullback in the domestic leisure segment.

While hotel operations were going strong, a different story played out in the transactions market, as the sector experienced a low not seen since 2020. The federal funds rate started 2022 at less than 1% and, by late summer of 2023, topped out at 5.25% to 5.5%; moreover, bank failures early in the year sent shockwaves through the investment community. These factors not only cooled the transactions market but sent an Arctic blast through it. As a result, transaction volume during the year declined by roughly 35% from 2022 levels.?

Looking forward to 2024, we expect the year to have a slow start but then gradually accelerate, ultimately landing with a much stronger finish. The U.S. may in fact avoid a recession, with very slow growth in the first two quarters followed by more significant economic growth in the third and fourth. We expect RevPAR to increase in 2024, albeit at a lower rate than that experienced in 2023. We may see a rate cut by the Fed by the summer if the anemic economic growth pattern predicted by many economists takes hold in the first half of the year. The cut may help fuel an additional layer of transaction activity in the hotel industry and other real estate sectors.?

More sellers are likely to bring hotels to market in 2024 as debt maturities are reached, PIP delays are exhausted, unavoidable defaults occur, or, conversely, successful post-pandemic business plans are completed. In the case of the latter, owners may become ready to sell high-cash-flowing hotels in order to move onto other opportunities at this point in the cycle. Now is certainly the time to buy. With fewer buyers in the market and financing more difficult to come by, hotels are receiving fewer offers. This less-frenzied environment leads to more normalcy in transacting and a higher likelihood that parties can get to a successful closing that not only satisfies the seller but also leaves the buyer in a position to implement a business plan for real value growth. The cost of debt may be high and may require heightened due diligence, but a refinance down the road coupled with an eventual sale after the implementation of that business plan (selling at a time when cost of debt will likely be lower than today) would likely lead to very favorable returns. We expect a more active year of transactions ahead and a relatively stable hotel operating environment.

Canada

By Carrie Russell, AACI, MAI, RIBC, ISHC , Senior Managing Partner – Vancouver, and Monique Rosszell , AACI, MRICS, Senior Managing Partner – Toronto and Montreal?

The year 2023 has set new benchmarks for the Canadian hotel industry. After reaching a RevPAR peak in 2022, the market RevPAR is on pace to grow another 15% in 2023, driven by strong growth in both occupancy and ADR. The leisure segment noted the benefit of increased transborder and international visitation, while the domestic market continues to provide a key base of demand.

The major metropolitan areas, including Toronto, Montreal, and Vancouver, also drove a large portion of the gains in 2023 as a result of strong meeting and group demand, much of it pent up from prior-year cancellations. These major markets are also seeing an improvement in commercial/corporate demand, especially in the fall. While demand is not back to historical highs, the return of key corporate accounts is beneficial, as a decline in the domestic leisure market is possible given the softening economic conditions and expectation of a recession. Supply growth in Canada has been muted throughout COVID with soaring construction costs. A conservative lending environment and higher interest rates also helped suppress the pace of new development.?

Transaction activity was strong in the first half of 2023, with some notable full-service trades in Toronto and Montreal; however, the pace of activity slowed in Q3. We expect that overall transaction volume will be $1.5 billion CAD for the year, which is slightly below 2022 and the forecasted $2.0 billion CAD in trades.?

The outlook for 2024 is cautious. Economic forecasts for the country indicate minimal GDP growth, with an anticipated slowdown in the first half of the year. Inflation is expected to fall back to the target level of 2.5%, and while the interest rate outlook is still uncertain, interest rate hikes appear to have peaked. The interest rate has the potential to decrease modestly beginning in the late spring or early summer. This cloudy economic picture is likely to dampen the domestic leisure travel that has been a large contributor to the strength of the hotel industry in recent years. That said, growth is still anticipated in the inbound international travel segment. Meeting and group demand is stabilizing, with modest growth anticipated, while the commercial segment is expected to see an uptick given that it has not recovered to the same degree as other segments. As a result, we expect RevPAR growth in the range of 2.0% to 4.0%. Supply growth is expected to track at a similar pace to 2023. With the record-setting RevPAR figures in recent years, the tightening of short-term-rental restrictions, and the anticipation of interest rate declines, the pipeline for development is expanding. On the transaction side, several larger deals are expected to close early in 2024, which should result in a comparable volume to 2022 and 2023.

About the Authors

Rod Clough, MAI is the President of HVS Americas. He is responsible for the overall direction, management, and ongoing success of 40+ offices across North and Latin America. Under his leadership, HVS Americas conducts over 3,500 valuation and consulting engagements annually. During his 30-year tenure, Rod has been instrumental in leading the growth of the firm; this includes significantly expanding the number of offices across the United States, as well as launching multiple divisions, including U.S. Hotel Appraisals, HVS Latin America, HVS Brokerage & Advisory, and HVS Asset Management & Advisory. A frequent speaker at the nation’s largest hotel conferences, Rod is a designated member of the Appraisal Institute (MAI) and a state-certified appraiser. He earned his BS from 美国康奈尔大学 ’s School of Hotel Administration and also holds a Colorado real estate broker's license. Furthermore, Rod is proudly Latino and gay, and his firm is welcoming of all races and colors, sexual orientations, ages, genders, and gender identities. Once associates join HVS, they tend to stay due to the extraordinary culture Rod has inspired—a culture defined by the ideals of balance, connectivity, efficiency, collaboration, honesty, integrity, kindness, and excellence, among others. Rod resides in Northern Colorado where he and his husband Jeff are raising their daughter, Rory. Contact Rod at (214) 629-1136 or [email protected].

Over the course of her 20-year career with HVS, Carrie Russell, AACI, MAI, RIBC, ISHC has been involved with appraisals and/or feasibility studies for over 2,000 hotel properties throughout Canada and the United States. She speaks regularly at industry conferences and has authored several articles on various topics relevant to the industry. As a member of the Appraisal Institute of Canada / Institut canadien des évaluateurs and the US Appraisal Institute , Carrie combines her hotel industry experience and education with her real estate credentials to assist clients in making informed hotel investment decisions. Contact Carrie at (604) 988-9743 or?[email protected].

Monique Rosszell , AACI, MRICS, is Senior Managing Partner of HVS Canada and leads the Toronto and Montreal HVS teams. Upon attaining a bachelor’s degree in economics from 加拿大女王大学 , she subsequently enrolled in the Master’s program in Hotel and Restaurant Management at the EHL (Ecole H?telière de Lausanne), Switzerland and then attained both her AACI and her MRICS appraisal designations in Canada. Monique has been working in the hotel industry for over 30 years and has completed hundreds of valuations and feasibility studies, including transaction and portfolio valuations throughout Canada and the USA. She is fluent in French and therefore has a strong presence in the Province of Quebec and New Brunswick. She also offers litigation and expert witness support in partnership disputes, hotel expropriation, insurance claims, and general hotel industry norms. She speaks at numerous conferences and is the trusted go-to hotel industry investment advisor within the lodging industry in Central and Eastern Canada. Contact Monique Rosszell at (416) 686-2260 ext. 23 or [email protected].

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