Skift Take
Today’s economic pressures are impacting consumers differently across income levels.
Luxury hotels in the U.S. have recently experienced robust growth in demand and room rates, while economy hotels have declined year-over-year. The numbers for the first five months of the year suggest a break with broad historical patterns.
“We’re seeing a bifurcation by hotel class,” said Jan Freitag, national director, hospitality analytics, at CoStar Group. “The higher-end traveler and, therefore, the higher-end hotels are showing robust growth in demand and room rate. But the same cannot be said for the lower end of the market.”
Here are the year-over-year trends for the first five months of the year, according to CoStar:
- Luxury hotel occupancy was up 1.8%
- Economy hotel occupancy was down 3.4%
This divergence breaks a long-standing pattern in the hotel industry. Typically, room demand across all segments tends to move broadly in tandem with GDP growth. The current split suggests that today’s economic pressures are impacting consumers differently across income levels.
“That roughly 5 percentage point swing is arguably quite unusual compared with historical trends since the 1970s,” Freitag said.
Strength in the luxury segment might be chalked up to a “wealth effect” from a recent sharp run-up in stock prices and increased home values, which makes affluent travelers feel more comfortable spending on luxury hotels.
Meanwhile, high inflation for core things for lower-income households, like housing, food, and car payments, may force them to prioritize essential expenses over discretionary travel.
“When you are a consumer in a household with a sub-$75,000 income, you feel the pinch,” Freitag explained. “There are things you have to have, and then there are things you want to have.”
The trend is particularly noteworthy given that it follows a period of strong performance in the economy sector, partly driven by pandemic-era stimulus payments. “We are basically just coming back down to normal,” Freitag noted. “But because GDP continues to grow, you would expect more growth in hotel spending than the deceleration we’re seeing at the lower end.”
While the national trends for luxury hotels and economy hotels are clear, there are local variations and exceptions. Markets that grew extraordinarily after the pandemic, such as Tampa and Miami, are now experiencing flattening demand even in the luxury segment.
What’s Next
The trends may change, too, if overall performance improves in the second half of the year with predicted cuts in interest rates supporting economic growth.
CBRE’s latest forecast projects a 3% increase in revenue-per-available room on average for the rest of the year, driven by international tourists, summer travel, and limited supply growth. If it materializes, that performance would be above the weaker-than-expected first quarter but below 2019 after adjusting for inflation.
But continued economic growth is no sure thing.
Looking at the long term, the industry is also eyeing potential catalysts for growth, particularly in the economy segment. Infrastructure spending, long anticipated as a potential boost for budget hotels catering to construction workers, has yet to materialize in force. “We’re waiting for this to happen in earnest,” Freitag said.
Last year, U.S. hotel supply growth was only 0.5%, held back by high construction costs and high interest rates in a tough financing environment. That represented a trend over multiple years. A weak level of supply additions should help support hotel rates in the medium term, based on data from STR.
So far this year, demand for economy hotels has weakened at a pace that overcame the supply constraint factor.
“Occupancy levels are affected by supply, but if you just look at demand as a factor, demand for luxury hotels was up 5% in the first five months of 2024, year over year, while demand for economy hotel rooms was down 4%,” Freitag said.
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