Hotels Enjoying Pent-Up Consumer Demand

When Keith Barr, CEO of IHG Hotels and Resorts, talks to owners of hotel properties around the world, he hears one central theme—there are unprecedented levels of demand and pricing power right now.

“Consumers want to travel,” Barr said on CBRE’s “The Weekly Take” podcast. “And everyone asked me about the recovery. It’s a direct correlation to vaccines and government restrictions and travel orders. And so as those lift, travel will come back.”

However, in areas with COVID flare-ups, travel will again be restricted, and occupancies will fall. But it can change quickly.

“Spain went from being amber to green for Ibiza, the island, and all of a sudden one of our hotels had a million dollars of revenue booked in one day,” Barr said. “It’s incredible.”

Rachael Rothman, head of Hotels Research & Data Analytics of CBRE, sees particular strength in the luxury segment, which has maintained rate integrity. She says that this cycle is different from previous lodging segments because demand did not evaporate.

“There were structural impediments put in place by either health concerns or government or travel restrictions, but the actual desire to travel was not limited,” Rothman says.

Even though there weren’t structural changes in demand, the pandemic did change things. Rothman thinks more companies could choose sunnier, less expensive markets for conventions.

Airline pricing, which has recovered, will also play a role. “If we think about a short business trip and the relative expense of the airline seat relative to the hotel room, you’ll see that the preponderance of the cost is actually in the airline seat,” Rothman says. “So I think that there’s a debate about whether or not people will make three trips across the US and spend no nights in a hotel or if they will make one trip across the US and stay two nights in a hotel and do three pieces of business at once.”

After factor affecting travel will be corporate budgets. Rothman says they won’t “rubber band” back to pre-pandemic levels.  “They’re going to move higher in a step-function fashion benchmarked against 2021,” she says. “When you go to pitch your 2022 budget, it’s going to be based on 2021, and you’re going to have to make a strong ROI case about why business travel or why specific trips or events are necessary in order to get approval.”

Barr thinks flights will decrease from the feedback he is getting, but the number of nights people spend in hotels for business travel should eventually return to pre-pandemic levels.

“I acknowledge the fact that I’m not going to get on the plane from London to New York for a three-hour meeting and fly back the next day,” Barr says. “And it’s bad for me, and it’s bad for the environment. And I know now we can do these things through technology. And so I think those sorts of trips are going to go away.”

While there is a lot of turbulence now, Rothman says the hotel industry seems to find ways to become more efficient coming out of each cycle. “Sometimes when you take your revenue and your cost basis back down to zero, you’re able to build things back incrementally and make smart decisions about where you want to layer on your talent [and] where you want to invest your capital,” she says.