Hospitality industry makes a strong comeback, but face key challenges

Hotel recovery beats expectations

The EY 2022 Hospitality CFO Survey gleaned responses from CFOs at 20 leading travel and hospitality companies. When the pandemic hit in early 2020, the entire hotel industry basically shut down. Analysts predicted it could be 2023 or even 2024 before RevPAR would return to pre-pandemic levels. However, 16 of the 20 leading CFOs surveyed believe the industry will reach that benchmark by spring 2023. Nine of those CFOs are even more optimistic, predicting a return to 2019 levels by the end of 2022.

Business travel still lagging

The EY CFO survey revealed a deep lack of confidence in the ability of business travel to aid RevPAR recovery. While 16 out of 20 CFOs said leisure travel would be the No. 1 factor in this effort, only two cited business travel and two others indicated group travel to lead the way. When asked for specific matters that are having a negative impact on RevPAR, respondents cited recession fears, a slowing economy, geopolitical concerns, companies cutting back on discretionary spending and air travel delays. This reduction in business travel has led to large conventions either not happening or being scaled back significantly from past events. 

Seven out of 20 CFOs surveyed ranked group travel as their third biggest concern, potentially having a negative impact on RevPAR recovery. It stands to reason that as confidence grows with leisure travelers, there will also be an impact on people traveling to weddings, conventions and other group excursions.

Long-term concerns temper industry optimism

One of the biggest issues facing hotels right now is labor shortages. Twelve of the 20 CFOs in the EY survey cited this challenge as causing the most strain on hotel net operating income (NOI). More than half of the respondents in the survey said they are adjusting amenities to customers and outsourcing various functions to try to reduce costs. Hotels are also raising pay to attract talent, with 17 out of 20 CFOs surveyed claiming they plan to do this. More than half of the respondents are also relying on technology more than before to get things done and create more efficiencies. 

While consumers confront higher average daily rates (ADRs) and even fewer amenities that now come at a price, there still seems to be a steadily growing pent-up demand for travel.

Deal market in hospitality sector remains active

On the transaction market, 13 CFOs in the survey said they expect 2022 deal activity to come out below pre-pandemic levels, and only four expect a return to pre-COVID levels. When asked to name the top three factors that would drive hotel transaction volume in 2022, 10 CFOs said interest rates would have the biggest influence on deal activity. In addition to making deals more expensive, rising interest rates could also boost pricing expectations for sellers, potentially putting deals out of reach for prospective buyers.

Hotel transaction activity is still forecasted to trend positively, and values are continuing to rebound. There is still a high level of interest in pursuing deals as the industry continues to bounce back and perform well. It’s worth noting, however, that transactions have slowed and could continue to slow in the coming months because of inflationary impacts and the rising cost of debt due to interest rate increases.