People on vacation have long been willing to pay extra for a hotel room with a great view, with oceanfront rooms among the most popular. But a handful of hotels have taken people’s desire for proximity to the ocean to a new level. At least nine hotels now offer underwater rooms featuring massive glass walls and ceilings that allow people to sleep beneath the ocean and watch sea life up close. Not surprisingly, the price tag for these rooms is equally extreme, with the cost of a night’s stay coming in at around $14K for a single night at certain locations.While the average person isn’t looking to fork over thousands of dollars for a single night’s hotel stay, ongoing skepticism about the prospects of the economy has still driven many people to become more conservative about their spending. Nonetheless, the outlook for the hospitality industry remains a mixed bag.Notable Improvement The hotel industry experienced record occupancy and revenues in 2023, and hotel construction activity is rising — particularly the construction of upper-midscale and upscale projects. According to data from Lodging Econometrics, hotel construction is close to an all-time high and is expected to continue rising throughout 2024, with projections for a 9% increase from 2023. That number is even higher for renovations and hotel brand conversions, which have hit record highs with 14% growth YoY.Travel is also on the rise — particularly international travel. Lodging Analytics Research and Consulting noted that international travel bookings ended 2023 at 11% above the levels in 2019. According to the World Travel & Tourism Council (WTTC), travel and tourism generated $10T in 2023 and half of the 185 countries it tracks had reached 95% or greater recovery by the end of that year. Travel is projected to remain strong this year and the WTTC anticipates that the overall value of the travel industry will soar to $15.5T within 10 years, a value of more than 11.6% of the global economy. Factors contributing to the strengthening of the hospitality industry include:
- Employment. Rising employment numbers among professionals with college degrees increase the likelihood of leisure travel.
- Household income. An increase in the number of US households with earnings of $100K or more is a factor, as people within this demographic tend to prioritize travel.
- Events. Event-specific motivators such as the 2024 Olympics and Taylor Swift’s Eras Tour provide a travel boost to certain cities.
- Technology. Biometric authentication, QR codes, and even artificial intelligence helping productivity and profitability have all helped improve the travel experience.
A Mixed Bag Despite the pickup that the hospitality industry has experienced since the pandemic finally started to recede, the industry is not entirely out of the woods. The surge in post-pandemic travel is expected to wane, and the hotel industry has seen occupancy shift away from higher-end properties to more affordable options. Analysts expect that ongoing uncertainty regarding the economy will continue to damper things. PwC also noted that changing macroeconomic conditions will continue to suppress activity for the industry through 2024, and expected growth for 2025 is only marginal. The hospitality industry continues to struggle with staffing shortages that resulted from the pandemic and that is expected to remain an ongoing problem for the foreseeable future. While much attention has been paid to the difficulty that airlines have had with staffing since the pandemic, the 62MM travel- and tourism-related jobs that were cut because of the pandemic have had a negative impact on the hospitality industry as a whole. Hiring qualified people remains a challenge. Resolving hospitality staff shortages may necessitate higher salaries. Another factor that community financial institutions should keep in mind when it comes to the hospitality industry is the looming impact of longtime higher interest rates. Given that several hotels defaulted in 2023, followed by a handful of more recent defaults among properties, including San Francisco’s Kimpton Alton Hotel and New York City’s Hotel on Rivington, among others, financial institutions should remain mindful that damage caused by the pandemic could result in further defaults. According to the Mortgage Bankers Association’s most recent commercial real estate finance Loan Performance Survey, delinquency rates rose to 6.3% of the balance of lodging loans at the end of 2024’s first quarter. The hospitality industry has made great strides in its efforts to rebound following the pandemic, but community financial institutions should continue to proceed cautiously and should not forget the ongoing challenges the industry faces.
