As we enter 2025, we reflect on the hospitality industry in 2024, which has proven to be a dynamic and interesting year. Though many of the challenges facing the industry have carried forward into 2025, some will be less of a factor moving forward. For example, by year-end 2024, challenges such as the highest interest rates in 30 years have started to recede but inflation remains a problem. The industry remains flexible and dynamic and continues to pivot to meet future challenges.
H&LA’s consultants have worked on many assignments in 2024, bringing with them the opportunity to see firsthand how some of these new concerns and trends are affecting all segments of the industry. While the hope is that some negative trends will not last, travel trends continue to evolve. How the hospitality industry responds will impact the growth of the industry in the coming years.
Hotel Sales
Green Street, a commercial real estate services firm, noted that commercial real estate was having a down year and noted hotel sales had experienced a small decline in the first half of 2024 versus 2023, largely due to the lack of portfolio sales. The lack of portfolio sales continued throughout the year; however, single-asset sales were strong in the third quarter. As the cost to build continues to outpace the cost to buy in many urban markets, well-capitalized investors are pursuing opportunities to acquire quality assets. Development costs are approximately 50% higher than acquisition costs per key according to JLL. This dynamic suggests a substantial discount of acquisition costs to replacement costs. The development cost premium will hurt new supply, particularly in markets where regulatory restrictions make new construction difficult. With these construction roadblocks, brands have been willing to use their balance sheet to obtain net unit growth. Hilton acquired Graduate Hotels and Hyatt added the Standard International and Bunkhouse brands in 2024. Marriott entered a long-term agreement with Sonder, which will add 9,000 rooms to its Bonvoy platform.
Interest Rates/Capital Markets
If this were a roller coaster, it would be an exciting ride. In March 2022, the Federal Open Market Committee raised the federal funds rate (0.25% at that time) by 25 basis points, signaling the first change in rates in two years in an effort to curb inflation. It would mark the first of 10 consecutive rate increases of various sizes, pausing briefly after the May 2023 increase only to rise 25 basis points in July 2023, resting at 5.50%. After analyzing subsequent economic data, the Fed lowered rates by 50 basis points in September 2024 and followed up with two 25 basis points reductions in November and December 2024 to a range of 4.25% to 4.50%. While the increases have impacted the nation’s inflation rate, inflation remains sticky and above the Fed’s target. In September, market participants anticipated four or five cuts in 2025 but at the end of 2024, expectations were for as few as two additional cuts. Despite the exciting ride, debt markets continue to improve, particularly for top-tier assets. However, loans are available with increased lender scrutiny in underwriting, but construction financing continues to be challenging despite the interest rate decline and rising demand.
Climate Influences
Climate events of recent years have substantially impacted property owners and investors both short- and long-term. Areas that serve as a refuge for displaced residents and workers can experience strong short-term occupancy gains while the impacted areas suffer substantial declines. In 2024, Tampa, Florida saw occupancy increase 24% during Hurricane Helene but as the community was directly impacted by Hurricane Milton, the Tampa and Orlando markets experienced a nearly 10% decline in October occupancy. According to Daniel Peek, president of JLL Hotels & Hospitality Group, approximately a quarter of hotels were damaged and closed. However, properties constructed to current building standards addressing flooding, storm surges, and high winds suffered minimal damage, and many remained open. Some insurers are withdrawing from high-risk areas and those remaining have raised premiums by 20% to 50%. Peek noted that climate-related events impact investment decisions as well, with investors limiting exposure to coastal regions. The concerns center on rising costs and availability of insurance, increasing property taxes needed to address storm-related infrastructure damage, and declining property values. These concerns extend beyond coastal markets as extreme temperatures and wildfires brought similar concerns regarding insurance costs, availability, and the impact on long-term investment decisions.
Talent War
The shortage of high-quality talent plays into the challenges of day-to-day operations and potential mergers and acquisitions. W. Chris Green, retired president of Remington Hospitality, noted that the acquisition of “30 really great hoteliers at once” was a factor in the acquisition of Chesapeake Hospitality. The acquisition, training, and retention of talent continues to be a competitive challenge. Employers continue to develop strategies to gain a competitive edge. Employee training and development makes companies more attractive to new hires and reduces turnover. A Gallup survey found that 90% of millennials identify professional development opportunities as important to them in their job. LinkedIn noted that 94% of surveyed employees would stay with a company that invested in their development. The use of AI recruiting tools is helping to find and hire talent faster and with greater success. Such uses include resume screening, job description writing, and skill assessment. But operators should not overlook the basics. Throughout 2024, thousands of hospitality workers went on strike. Officials of Unite Here have stated that hotel workers deserve to benefit more from growing industry revenues. More specifically, hospitality union workers are seeking higher wages, fair staffing and workloads, and the reversal of COVID-era cuts such as the return to daily housekeeping. A hotel technology strategy that addresses some of the issues involves cashless tipping for individuals such as housekeepers and bellmen. As guests are less inclined to carry cash, digital tipping allows guests to reward for the service they receive. In fast food dining, where similar practices have become more common, it has been shown to increase wages by 20% to 30%. In addition, it has shown to be a positive for staff morale, and a boon for recruitment and retention as workers receive appreciation for hard work from guests.
Customer Experience
Personalizing a guest’s experience is an ongoing process for hospitality operators. The array of major hotel brands is an example of catering to a wide range of travelers with varying budgets and travel styles. Each brand targets specific traveler needs and expectations. The major brands may have an advantage in developing the personalized experience with information collected through their expansive loyalty programs while independents sometimes struggle to collect such data. Personalization has been adopted by restaurants as well in the form of menu presentations. Regardless of the cuisine, restaurants are expanding the presentation to include gluten-free options as well as vegetarian and vegan options. The growth of food halls allows guests to choose from a variety of options while dining as a group. Marketing of hotels has evolved through the use of a combination of channels. Social media platforms aid brands and individual properties in promoting their product and provide personalized customer service.
Retail Brand Hotel
Recently, a number of luxury retail brands have entered the hotel space. Shinola, a Detroit-based lifestyle brand that sells luxury goods such as watches, leather goods, etc., also operates the Shinola Hotel, a boutique hotel in downtown Detroit. Other examples include The Baccarat Hotel New York, The Bulgari Hotel in London, and The Armani Hotel in Dubai. Muji, a Japanese retailer that sells a wide variety of household and consumer goods, operates hotels in Japan and China that are also showrooms for its products. Equinox plans to open a line of hotels, including one in New York’s Hudson Yards development. Equinox hotels will be open to anyone, but members of the brand’s fitness centers receive special privileges. The luxury and lifestyle hotels provide benefits to mixed-use properties. Hotels generate traffic and meet the needs of retailers and restaurants. A compelling experience is a priority for hotels and resorts. Furnishings, lighting, and décor are important factors in catering to the hotel guests. As with Muji and Equinox, the hotels can be used as product-selling platforms. Retail-branded hotels support connections to the brand’s products and bolster relationships with customers.
Legal Considerations
The California Junk Fee Law was passed with the goal of eliminating hidden fees in the hotel industry. Hotels must provide transparent pricing with add-ons like resort fees included in the advertised price. As the law targets consumer transactions, some legal professionals believe that the statute applies to out-of-state properties as well. If a property knows that Californians are looking at its property online, has a history of Californians staying at its property, or has reason to believe guests from California frequent its property the law applies. Minnesota passed a version of this law set to go into effect in 2025. In December, the Federal Trade Commission issued a final Junk Fee Rule to prohibit tactics to hide total prices and junk fees in live-event ticketing and short-term lodging. New York City passed the Safe Hotels Act in October 2024. The statute requires hotels to obtain a license to operate (two-year term) and pay a $350 fee. Properties with more than 100 rooms are required to directly employ their core employees (hotels with under 100 rooms may use contract labor), provide continuous coverage of the front desk, schedule a security guard, provide core employees with panic buttons, receive human trafficking recognition training, and provide daily housekeeping unless the guest declines. The minimum wage is set to increase in a record number of jurisdictions in 2025. A total of 65 cities and counties and 23 states will increase minimum wage throughout the year, and 70 the jurisdictions will meet or surpass $15 per hour. This is on top of minimum wage increases in 25 states and 60 cities in 2024.
Hotel Pushback
During the pandemic, many property improvement projects were postponed. Industry experts note in recent years a growing resistance of property owners to address deferred maintenance, property improvement plans, and renovations. During the third-quarter call, Hyatt’s president noted that the year-to-date attrition rate of properties approaches 1.5%, which is significantly higher than the typical rate of 0.5% to 1%. He noted that about 40% of the attrition has to do with brand standard and market-specific issues. However, he does not see this as a long-term trend, and, due to a strong pipeline, Hyatt’s network growth is 6% year-over-year.
Environmentally Conscious Design
Environmentally conscious and sustainable design is an increasingly critical component of design. Park Hotels & Resorts has a dedicated team focused on this aspect of design as it relates to the hotel, the guests, and the vendors. In each development project, human comfort and sustainable, cost-effective real estate needs to be part of the solution. The Hotel Marcel in New Haven, Connecticut, boasts high-performance windows, exterior insulation, continuous air-sealing, and heat recovery technology that reduces the property’s energy consumption for heating and cooling by 80%. The property operates fully on renewable energy. Artificial intelligence modeling of wind and solar output allows architects to focus on various materials to see which ones emit more or less heat. Not all materials are brick and mortar. Designers often use plants to soften the architecture and add natural shade for functionality and sustainability. While development costs for a LEED-certified property may exceed historic development costs, studies continue to show that guests are willing to pay more for hotels that they perceive as environmentally friendly. Travelers often consider sustainability when choosing a hotel.
Bifurcation in Hotel Liquidity
JLL noted that through Q3 2024, RevPAR was up 14.3% compared to 2019, but only 1.2% versus 2023. The decline in domestic leisure travel bears much of the blame for the stagnation. Leisure markets and properties targeting budget-conscious guests have been hardest hit while luxury and urban markets have seen growth powered by international travel and group and corporate demand. The decline in consumer savings, higher interest rates, and reinstitution of student loan repayments have deeply impacted the leisure market. The high-net-worth consumer has been less impacted, resulting in improved demand in the luxury segment. With the increase in international travel and group and commercial travel, many industry participants see people going back to traditional travel patterns. While RevPAR has recovered relative to 2019 levels, net income continues to drag from rising labor costs, particularly in urban areas. With rising debt costs and PIP requirements, cash-strapped owners struggle.
In 2024, the hospitality industry continued to be influenced by lingering impacts from the COVID-19 pandemic, such as labor shortages and supply chain issues, but the market has taken steps to address most challenges. The challenge of inflation associated with F&B and labor costs and the high cost of money continue to impact the industry. The leisure traveler’s demand step back is being offset in many markets by the increase in international travel and group and commercial demand. Many of these trends and issues will continue into 2025, making it another year of interesting challenges for the industry to navigate. However, as the industry has proven time and time again, the ability to be dynamic and pivot towards those challenges and trends will serve the hospitality sector well heading into the new year.
