In 2023, the national lodging market continued to achieve high performance levels, while occupancy growth was minimal, compared to the level achieved in 2022, average daily rate (ADR) and revenue per available room (RevPAR) reached all-time highs.

This robust performance reflects a strong recovery and growth trajectory following the disruptions caused by the COVID-19 pandemic. Data for 2024 illustrate that the hotel industry has continued to experience minimal improvements in key performance metrics.

Despite occupancy remaining relatively flat, both ADR and RevPAR have shown continued growth thus far this year. These healthy metrics typically create a supportive environment for new hotel construction; however, the elevated costs of debt and capital compared to previous years have been a significant deterrent, effectively slowing down construction activity.

While the market is generally thriving in terms of topline operational metrics, elevated construction costs as well as the increased cost of financing new projects has led to a slowdown in the pace of new hotel developments. High interest rates and stringent lending conditions are challenges for developers trying to push new projects through the pipeline.

Thus, supply growth moderated in 2023 and is only expected to increase minimally over the next few years as the economy continues to normalize.

HVS has tracked hotel development costs for over three decades, collecting data from actual hotel cost budgets during our assignments. This 2024 survey reports per-room hotel development costs based on data compiled by HVS from hotel projects proposed or under construction during the 2023 calendar year.

The data reflect eight product categories: limited-service, midscale extended-stay, upscale extended-stay, dual-branded, select-service, full-service, and luxury hotels, as well as redevelopment projects. Given that this survey provides a retrospective view, inflationary factors that continued through 2023 and the year-to-date 2024 period may not be fully reflected in the data.

The HVS U.S. Hotel Development Cost Survey sets forth averages of development costs in each defined lodging product category. The survey is not meant to be a comparative tool to calculate year-to-year changes, but rather, it reflects the actual cost of building hotels across the United States in 2023.

As will be discussed, the medians and averages set forth in this survey are greatly affected by the types and locations of hotels being developed at this point in the economic cycle. Our goal in sharing this publication is to provide a basis for developers, investors, consultants, and other market participants to evaluate hotel development projects.

Given that development costs for hotels are dependent on a multitude of factors unique to each development and location, this report should not be relied upon to determine the cost of actual hotel projects or for valuation purposes. Instead, it is intended to provide support for preliminary cost estimates, as well as to show a comparison across the various hotel categories.

SUPPLY-AND-DEMAND DYNAMICS AFFECTING HOTEL DEVELOPMENT

In 2023, hotel occupancy remained fairly stable, while ADR exceeded previous levels. STR reported national year-end 2023 occupancy and ADR at 63.0% and $155.62, respectively. In the year-to-date period through June 2024, the metrics were reported at 62.6% and $157.50, respectively, equating to a 0.4% decline in occupancy and a 1.8% increase in ADR when compared to the same period in 2023.

Meanwhile, RevPAR was up 1.4%, compared to the same period in 2023, highlighting the industry's ability to generate higher revenues and adapt to post-pandemic conditions.

EXHIBIT 1: U.S. ADR & REVPAR REACH ALL-TIME HIGHS IN RECENT YEARS, BUT OCCUPANCY STILL RECOVERING

Source: STR

The travel market landscape in the United States is undergoing significant rebalancing in the post-pandemic era. While RevPAR, a key performance metric in the hotel industry, is up slightly on a nationwide scale, the growth has not been shared equally. Thus, while some markets are improving, others are stabilizing or declining, balancing out the overall performance.

Many leisure-oriented markets, which were the first to bounce back after the pandemic, are now experiencing a correction, with some resort destinations showing flat or declining performance as the initial surge in demand is now tapering off. The moderation in leisure market performance is partly due to an increase in outbound international travel, as more Americans opt for overseas vacations.

At the same time, inbound international travel to the United States remains below pre-pandemic levels, further influencing these trends. Urban destinations, which suffered more during the pandemic because of group restrictions and reduced business travel, are now experiencing a stronger recovery, primarily driven by an increase in group demand.

To further illustrate this point, primary markets, which represent the top 25 cities in the United States, experienced an 8.3% increase in RevPAR in 2023, compared to 2022, and 2.5% RevPAR growth in the year-to-date 2024 period.

In contrast, all other markets experienced more modest RevPAR growth of 2.2% in 2023 and 0.4% in the year-to-date 2024 period, demonstrating the stronger recovery of the larger markets in the last 18 months.

Read the full article here