Blog

The effects of inflation on the hospitality real estate market

The effects of inflation on the hospitality real estate market

As expert consultants, Hospitality Insights regularly surveys business owners to assess the hospitality real estate market. The balance of the third quarter of 2022 reflects growing distrust in the face of rising interest rates and inflationary trends. The study, called the Hospitality Investor Sentiment Index, can be consulted in full here, but we wanted to highlight some important findings.

The first is the widespread concern about the prolongation of the conflict between Russia and Ukraine. The increase in energy costs and inflation make it likely that hotel demand will decrease in the coming months. Post-pandemic optimism has been left behind as businessmen believe that both tourists and business travelers will reduce their travel and accommodation bookings.

However, this pessimistic view contrasts with the opinion of the major hotel operator brands, airlines and tour operators. They say bookings for next year remain intact and business profitability is returning to pre-2020 levels. So we will have to wait until after the first half of 2023 to draw conclusions.

“While hotels have so far proven to be a relatively effective hedge against inflation, many investors are expressing a much more pessimistic view of both leisure and corporate demand over the next 12 months. Undoubtedly, tightening consumer conditions are driving this view, and stagnant revenue growth could exacerbate the negative impact of cost inflation on hotel profitability,” explains Joe Stather, Market Manager for Questex’s Operational Real Estate portfolio.

It is no secret that rising interest rates make borrowing more expensive and are a major drag on investment. In this regard, the Hospitality Insights survey makes it clear that the hospitality real estate market will opt for caution and prefer to emphasize asset management rather than embark on new construction. 

Nearly 90% of the entrepreneurs participating in this quarterly survey indicated that they are working on finding a new brand or operating partner for their hotel development services, a strategy that will allow them to stand out in the industry and meet new customer needs and expectations.

“For now, it appears that our Investor Council members intend to increase their focus on asset management to further optimize what they currently own and offset the increasing pressure on revenues. Technology implementation remains high on the agenda, but there has been a notable increase in those looking for a new brand and/or operating partner,” explained Stather.

The good news is that investors in the hotel sector still have significant amounts of capital and therefore have not ruled out disbursements for new projects in the medium and long term, so it is very likely that they are just waiting for the political and economic conditions of the environment to stabilize before investing again. Because the hospitality real estate market is a sector in continuous movement, expert hotel development will continue to be a very attractive option for the powerful investor who expects secure returns in the medium term.