Hotel market
Post-pandemic recovery and market dynamics
Executive Summary
In this section
Travel as an essential need
Decades of data on leisure travel make one thing abundantly clear: the only way is up. More people are travelling, people are travelling more often and people are travelling greater distances. This trend is based on a combination of factors, including but not limited to, income growth and population growth (rise of the middle class), the increase in leisure time, the emergence of budget carriers, the diversification of the hotel offering, the rise of city marketing, the growth of social media and the experience economy (supported by social media), globalisation, digitalisation (ease of booking, comparisons) and the blurring of visit reasons (including mixing business and private reasons).
The Covid-19 period did, however, deal a major blow to the travel industry. The hotel sector suffered significantly from the restrictions that applied at the time to (international) travel and accommodation.
On the consumer side, this led to pent-up demand and in the post-Covid period it is clear that many travellers are now looking to catch up on the trips they missed and opportunities they had to pass up, a trend sometimes called ‘revenge travel’.
This trend is also supported by the fact that a fair share of households saved money during the Covid-19 period and thus built up a buffer that could be spent on travel after Covid-19. This is a global phenomenon and also visible in the Dutch hotel data: since Q2 2022, the number of overnight stays in hotels in the Netherlands has been at a record high.
65.9%
more overnight stays in H1 2023 than in H1 2012
The right-hand axis of the graph clearly shows that the share of international tourists in overnight stays grew steadily: from 48.8% in 2012 to 55.4% in 2019 (the last full pre-Covid year). This share fell sharply during Covid-19 and the Dutch hotel recovery was mainly due to greater growth in domestic tourism, which somewhat compensated for the lack of international guests. However,
in the last full quarter for which data is available (Q2 2023), the share of international guests had already increased to 55.7%, only slightly lower than the record high shares in Q2 2019 and Q3 2019. The conclusion, therefore, is that international tourism is now back at full strength.
“More than ever, people are looking for new experiences – travelling is an important part of that.”
And business tourism? That is the one part of travel sector that actually remains behind. On an annual basis, the trend can be seen in the graph above. The number of business overnight stays, also lagged significantly in the first half of 2023: -18.1% compared to the peak in H1 2019. Bouwinvest does not expect the share of business tourism to recover to historical levels for the time being, due to finance, sustainability and efficiency.
Notably, the length of the average stay of foreign guests in a hotel is increasing (see graph below). There is no hard substantiation of this trend yet, but it could be that business visits are becoming more efficient (travel less often but stay longer), or that travellers combine both business and leisure during their visits.
This trend includes people going on a so-called workcations. As work can increasingly be carried out online and remotely and as employers are becoming increasingly accustomed to the idea of their employees working remotely, this is a trend that might grow substantially.
The leisure market versus the economic cycle
The hotel sector, together with the retail sector, are the sectors with the closest connection to the real world economy. Despite the undercurrent of continued growth due to the trends mentioned above, the hotel sector is significantly affected by economic cycles. During economic downturns, consumers usually also cut back on trips and holidays.
As a result, the demand for hotel rooms declines and hotels will then drop their room rates to compete with other hotels and attract tourists. This was clearly visible in the period surrounding the GFC, when it took 5-7 years for room occupancy and room rates to return to pre-GFC levels.
Forecasted RevPAR recovery far quicker than during GFC
As described above, pent-up travel has triggered a strong return of tourism in the post-Covid world. Hoteliers increased their room rates to unprecedented levels and saw total room revenue (RevPAR) rise sharply. And all of this in an uncertain economic environment, in which consumer confidence has been at an unprecedented low level for 18 months and real disposable income is under increasing pressure.
The question, however, is how long this will last and whether the current economic uncertainty might lead to a stagnation or even a slight decline of the short-term growth in overnight stays and room rates. In addition, the increased room rates put pressure on the affordability of hotel rooms, especially for the lower middle class.
The question here is when the tide will turn. If economic headwinds remain, this will ultimately have a negative impact on the tourism market and room rates will have to drop. But at the moment that is clearly not the case.
New supply
Tourism has become so huge that the most attractive cities in the world are struggling with an excessive influx of tourists. This also applies to Amsterdam, which is trying to channel tourism in various ways: significant restrictions on the construction of new hotels, limiting rental options through platforms such as Airbnb, actively promoting secondary alternatives around Amsterdam and significantly increasing tourist tax.
New construction is currently difficult to realise in the Netherlands due to high construction costs (further increased by sustainability requirements) and the need to curb emissions of nitrogen oxides, resulting in severe limitations on new developments.
Challenges and opportunities on the hotel investment market
The hotel real estate market has also been affected by sharply rising interest rates and the consequent decline in appraised values. However, as in a number of other subsectors, we have seen a significant increase in market rents, underpinned by the high demand for hotel stays, which has in turn led to higher room rates. This means that property values have, for the time being, fallen relatively modestly compared to the peak in mid-2022.
Because financing is still expensive due to high interest rates, non-leveraged investors have an edge when making hotel investments. These are, however, still relatively limited as the market is still in search of a new price equilibrium.
The aforementioned limited new construction developments in the Netherlands only further strengthen the position of existing hotels. However, almost all existing hotels score poorly when it comes to sustainability, and significant investments will have to be made to address this issue. This could become a significant underlying driver of hotel investment transactions in the coming period. Bouwinvest also expects the yield spread between green and brown assets to widen further in the hotel investment market in the coming period.
A final possible catalyst of the hotel investment market is the fact that while independent hotel owners saw revenues increase they also saw a similar rise in costs. High inflation led to substantially higher wages, higher purchasing costs and especially higher energy costs.
This can clearly be seen in the graph below, which shows three key hotel metrics (all per available room): room revenues (RevPAR), total revenues (TRevPAR) and gross operating profit (GOPPAR). While the 2022 TRevPAR is clearly up from 2019, this is not the case for the gross operating profit, which includes operating expenses.
This might result in an increasing share of owner- operators aiming to dispose of their real estate and focus on the operation, which could prompt an increase in sale and lease-back transactions.