Executive Summary 1
U.S. hotel fundamentals softened in Q2 2023 as more Americans travelled overseas and inbound international travel recovered only modestly. We expect modest RevPAR growth for the rest of 2023 and early 2024, fueled by improved business and group travel and an increase in international visitors.
The Caribbean sustained positive momentum, with strong gains in visitor arrivals. We expect developers to break ground on new hotel projects in 2024 and a handful of properties to change hands, reflecting investors’ healthy appetite for Caribbean hotels.
Europe's hotel sector is showing signs of recovery, aided by pent-up consumer demand. Nearly all markets saw higher ADR and RevPAR in H1 2023, especially in the luxury and upscale segment. Hotel investment remained subdued, however, due to costlier debt finance and modest yield expansion.
While domestic tourisim has rebounded, international travellers have been slower to return to Asia-Pacific. However, with Chinese tourism on the increase, hotel ADR has grown in most markets on a USD basis.
1 Our outlooks reflect hotel KPI data as of June 30th and CBRE's macro-economic forecasts as of mid-August. The outlooks do not anticipate black swan events such as the October 7 terrorist attack on Israel. We expect to have updated outlooks on the hotel market by November 16. In the meantime, please contact us for our latest insight and analysis.
2023 U.S. Midyear Outlook
After growing strongly off a low base in Q1 2023, U.S. hotel fundamentals softened during Q2 amid tepid demand. RevPAR growth slowed to 1.1% year-over-year, well below the 15.9% achieved in Q1. Weaker performance was driven by more Americans electing to travel overseas at a time when inbound international travel has recovered only modestly. The hotel market was also challenged by a 12.5% increase in short-term rental demand, resurgent cruise ship bookings, and the depletion of excess consumer savings.
Markets, chain scales and location types that led the initial post-pandemic recovery lost momentum in Q2 2023. Economy and midscale RevPAR, which peaked at 22% and 20% above 2019 levels in December 2021 and December 2022, declined 4.4% and 1.6%, respectively. Resort RevPAR, which peaked at 127% of 2019 levels in September 2022, fell 3.5% in Q2. In contrast, RevPAR for urban locations, which has only recently recovered to 2019 levels, rose by 5.0% in Q2 2023 — the only location type to improve materially during the period.
U.S. consumers have proven to be resilient amid continued job gains and they continue to spend significantly on travel. We will wait to see more evidence that consumer preference for cruise lines, short-term rentals and international travel proves sustainable. The rebound in domestic travel seems likely, particularly with schools back in session.
While CBRE remains optimistic about the recovery of domestic tourism and increased business and group travel and international visitors, we have downgraded our expectations for RevPAR growth for the rest of 2023.
H2 2023 RevPAR is now expected to grow by 2.0%, down from 3.2%, while full-year RevPAR will increase 4.6%, down from 6.0%.
Urban hotels are expected to perform best over the five years from 2022 to 2027 with RevPar projected to be up 5.5% on a compound annual basis. Resorts are expected to achieve more limited RevPAR gains, following outperformance over the past few years. Among chain scales, the luxury and upper upscale sector should register the strong gains with compound annual growth of 5.2% and 5.7%, respectively, over the five-year period.
Ten of the 65 hotel markets tracked by CBRE have not yet seen RevPAR return to 2019 levels, mainly in north-ern California, the Pacific Northwest, and certain upper Mid-West urban markets. Other urban markets, such as New York, Chicago, and Washington, DC, are expected to exhibit healthy growth this year and next, especially compared with markets that have already recovered, such as Charleston and Savannah.
CBRE continues to expect RevPAR growth of 3.8% in 2024 due to the potential for stronger inbound international travel from Asia-Pacific as visa delays diminish and airlines’ long-haul capacity improves, along with continued improvements in business and group travel. However, higher interest rates, higher oil prices, the burndown of excess savings and resumption of student loan payments are headwinds to the recovery.
2023 Caribbean Midyear Outlook
Many island nations posted record visitor arrivals in 2022, and that momentum carried into this year’s winter and spring seasons. Passenger traffic at the San Juan International Airport in Puerto Rico, the region’s largest, was up nearly 20% vs. year-over-year through June. Punta Cana, in the Dominican Republic, the region’s second largest airport, registered a similar increase.
While Cancun saw visitor arrivals grow by 12.4% year-over-year during H1 2023, its domestic segment grew twice as fast, indicating the strength of the Mexican consumer. With the U.S. State Department recently removing a travel warning for the Mexican state of Quintana Roo, the recovery could gain further momentum heading into the 2023/2024 winter season.
The upbeat H1 2023 data came as a pleasant surprise to observers who felt a rebound in U.S. travelers to Europe and on cruises would dampen Caribbean hotel demand. Despite this strong H1 performance, many hoteliers expect a softer 2023/2024 winter season as they have encountered difficulty in pushing up room rates. While the region has been spared any major hurricanes so far this year, September and October are the two riskiest months.
From a development standpoint, the region’s hotel pipeline is manageable. All-inclusive resorts continue to dominate new openings, with the larger U.S. hotel groups including Marriott, Hilton and Hyatt remaining at the forefront.
Although capital availability in the U.S. has been constrained by rising interest rates, Caribbean hotel financing remains available mostly via domestic lenders in Mexico and the Dominican Republic. Developers and hotel owners have a healthy appetite for new projects and property acquisitions, with costs viewed as manageable considering the long-term demand trends.
In 2024, CBRE expects ground to be broken on more new development projects and a handful of properties to change hands in Puerto Rico, the Riviera Maya/Cancun area, the Dominican Republic and emerging markets like Curacao and St. Martin.
Figure 1: Americas Hotel Performance & Key Macroeconomic Indicators as a % of 2019
Source: Kalibri Labs, CBRE Hotels Research, Smith Travel Research, Oxford Economics, International Air Transport Association.
2023 European Midyear Outlook
Europe's hotel and tourism sector is showing signs of recovery, spurred by the release of pent-up consumer demand. The revival of intra-regional tourism, coupled with significantly more visitors from the U.S. — the primary source of long-haul tourism — has underpinned solid growth and may portend foreign arrivals returning to pre-pandemic levels by mid-2024.
While the recovery of air traffic volume initially lagged the surge in consumer demand during the first few months of the year, recent data reveal a robust recovery in flight capacity to Europe, especially during the summer vacation season.
Europe has maintained its status as a favored destination for travelers worldwide, particularly in key coastal and gateway cities. Europe has ac-counted for more than half of total global international travel for the last decade. Tourism Economics data reveal that London holds top spot in terms of international arrivals, followed by Paris, Barcelona, Istanbul, and Amsterdam. With these markets projected to sustain their growth trajectory, they are forecasted to collectively surpass 50 million arrivals in 2024, a number exceeding those recorded in 2019. This continued strong growth reflects the priority consumers place on travel experiences, even in the face of higher travel expenses and constrained budgets.
Nearly all European markets reported higher ADR and RevPAR in 2023, especially in the luxury and upscale segment. France, Italy, Ireland and Greece outperformed, achieving ADRs that exceeded 2019 levels by more than 30%. ADRs in the Netherlands, Spain, Belgium, Poland, and the United Kingdom surpassed 2019 levels by over 20%.
While hotel occupancy rates continue to increase gradually, several key European markets are still below 2019 levels. In markets like Frankfurt, Helsinki and Istanbul, a slight improvement in occupancy rates could potentially support RevPAR growth in 2024.
Figure 2: European Hotel Performance & Key Macroeconomic Indicators as a % of 2019
Source: Smith Travel Research, Oxford Economics, International Air Transport Association.
CBRE expects ADRs to continue rising in key gateway cities in H1 2024, albeit at a more modest pace. This steady growth momentum should counterbalance rising operational costs. Paris should continue to be a standout, with hotel trading metrics that are well ahead of other cities in the region. The 2023 Rugby World Cup has spurred a surge in both demand and room rates, while the 2024 Summer Olympics should provide additional impetus.
Rising interest rates and higher financing costs have tempered hotel transaction activity across most European markets in 2023. France has defied this trend, however, registering a 40% y-o-y increase in hotel transaction volume in H1 2023 on the back of strong tourism demand and positive investor sentiment in the run-up to the Olympics.
Limited yield expansion and costlier debt finance should continue to con-strain hotel investment activity until 2024. Investors are waiting for concrete signs that interest rates have peaked.
2023 Asia-Pacific Midyear Outlook
While domestic tourism has rebounded, international travel in Asia-Pacific has yet to reach historical levels. As of July 2023, average monthly inter-national arrivals for key Asia-Pacific tourism destinations stood at just 80% of the levels registered in 2019. This indicates substantial room for improvement in the hotel sector, with a full recovery expected in 2024.
Outside of macroeconomic factors, airline capacity is the biggest obstacle to international travel’s full recovery. International Air Transit Association (IATA) data show that aircraft capacity in Asia-Pacific is expected to reach 86% of 2019 levels by the end of the year and return to pre-pandemic levels by the end of 2024. The impact on specific markets varies, with out-bound aircraft seating capacity down -42.6% in Hong Kong from August 2023 to August 2019, -23.4% in Korea and -10.5% in Japan. However, China, which remains the largest outbound tourism source market in the region, had roughly 85 million aircraft seats available in August, a rise of 6.5% over the same period of 2019.
Operators are hopeful that a rebound in travelers from China, aided by the government's easing of group travel restrictions in early August, will offset a recent slowdown in outbound travelers from other key markets. Hong Kong and Southeast Asia were early beneficiaries of the revival in outbound tourism activity from mainland China, with expectations that Chinese tourists will soon return to favored markets of Japan, Korea, and Taiwan.
With more China-generated tourism activity now hitting the market, hotel performance in Asia-Pacific has so far sidestepped the effects of a slowing broader regional economy. ADRs have grown across most markets on a USD basis (+9.8% year-over-year in July 2023), particularly in Japan (+33.8%), Hong Kong SAR (+27.9%) and Singapore (+26.9%). Australia is the only major market in the region to see a notable decrease (-7.0% y-o-y).
Aside from the one-off impact of event-related tourism such as the Singapore Grand Prix in September 2023, CBRE expects ADRs to be little changed in most markets for the rest of the year. Japan will be the only exception owing to its favorable foreign exchange rate and relative affordable lodging costs, which have made it the number one travel destination in Asia-Pacific this year. This should bolster operators’ ability to further raise room rates.
Figure 3: Asia-Pacific Hotel Performance & Key Macroeconomic Indicators as a % of 2019
Source: Smith Travel Research, Oxford Economics, International Air Transport Association.
Regionwide, average occupancy increased by 10% y-o-y to 70.7% in the 12 months to July 2023, with all markets recovering to some extent. This is still 480 bps below 2019 levels, and higher occupancy is expected to contribute only modestly to hotel revenue growth over the next 12 to 18 months.
Hotels continue to perform well compared with most other operational real estate assets in Asia-Pacific. As a result, institutional investor interest in the region’s hotels remains elevated. Although Japan, Australia and resort destinations continue to attract the bulk of capital, investors are willing to explore opportunities in other markets that offer strong risk-adjusted returns at attractive entry cap rates such as Japan, Australia and other resort markets in the region.