US and European hotel room rates are skyrocketing, and experts believe they could become even more expensive as demand continues to outpace supply.
The tightening lending standards imposed by regional banks in the US have made it increasingly difficult for developers to secure funding for new hotels.
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This, coupled with the surge in travel demand following the Covid-19 pandemic, has resulted in a limited supply of hotel rooms and is sustaining higher prices, according to industry executives.
Insufficient supply hinders US hotel room growth
Despite the growing demand for travel, the supply of hotel rooms in the US is barely expanding. Industry leaders have pointed out that the stringent lending standards from regional banks have made it challenging for developers to obtain the necessary funding for new hotel projects.
The current sustained high prices are a consequence of the limited growth in supply, which should have occurred years ago.
IHG Hotels and Resorts CEO Keith Barr emphasised this point during the NYU International Hospitality Industry Investment Conference, stating that the industry has experienced significant supply growth over an extended period, which has kept rates down in the past.
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By GlobalDataLimited growth in US hotel room construction
In April 2023, the number of hotel rooms in the US increased by only 3% compared to the same month in 2019.
The number of hotel rooms under construction in April 2023 stood at 153,000, a significant decline from the peak of 220,000 recorded in April 2020, according to STR, a hotel analytics firm.
The industry does not expect a significant increase in supply in the next one to two years, further exacerbating the shortage.
Surging rates reflect supply-demand imbalance
The consequences of limited supply are evident in the rising hotel rates. In May 2023, the average nightly rate for a hotel room in the US reached $157.45, a 17% increase from the same month in 2019.
During the pandemic, rates plummeted to $73.25 in April 2020 and did not consistently exceed $100 until March 2021, as reported by STR.
While current rates may seem high compared to the drastic decline in 2020, they still reflect the supply-demand imbalance in the industry.
Potential drawbacks of higher rates
While the surge in hotel rates is beneficial for the industry, it may also have unintended consequences.
Data from US hotel bookings reveals three consecutive months of negative year-over-year growth, suggesting that higher rates may be discouraging some consumers from booking hotels.
Michael Tran, a managing director at RBC Capital Markets, notes this trend and warns that sustained high rates might hinder the industry’s recovery.
Europe experiences similar challenges
The situation in Europe mirrors that of the US, with mid-scale and economy hotel rooms costing 15% to 20% more than pre-pandemic rates.
Sebastien Bazin, CEO of Accor, highlighted the sustained increases in prices, stating that hotel operators had been hesitant to adjust room prices for the past 20 years. The demand for hotel rooms remains strong, with guests often not even inquiring about prices but simply requesting the best available suite.
In the first half of 2023, hotel room rates in Paris surged by 50% compared to 2019, while London experienced a 30% increase.
Outlook for the industry
Industry executives recognise that there will be a limit to how high hotel room rates can go. However, they believe that the industry has not yet reached that ceiling.
While higher prices are currently sustaining the market, the ongoing supply shortage and increasing demand indicate that hotel room rates may continue to rise in the foreseeable future.
The industry eagerly awaits a supply-demand equilibrium that will help stabilise prices.
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