Despite an elevated level of economic uncertainty, Lodging Analytics Research & Consulting (LARC) remains very encouraged by the U.S. lodging industry’s recent performance and our outlook for 2022 and 2023 is modestly improved, while our long-term outlook is minimally altered. 

The third quarter marked the first quarter of positive U.S. GDP growth in 2022, with an increase of 2.6%. While economic activity has disappointed expectations heading into 2022, it has not impacted lodging fundamentals as one might have expected. U.S. RevPAR rose 17% in 3Q2022 on a year-over-year basis, driven by a 12% increase in ADR and a 5% increase in occupancy. Additionally, 3Q-2022 RevPAR was 12% above 2019 levels driven by ADRs that were 16% higher which was slightly above the 2Q-2022 level of 11% above 2019 levels. 

While declining economic activity has not had a meaningful impact on the lodging recovery to date, as the cycle shifts from recovery into expansion, economic activity will become a primary driver of performance. With the outlook for economic expansion remaining muted, it is our view that growth in fundamentals will substantially slow in 2023 and again in 2024. 

As of October, economists surveyed by the Wall Street Journal estimate a 63% probability that a recession materializes within the next twelve months. That is the highest probability in the past two years. Moody’s Analytics (the economist we use) believes that the country is teetering on the brink of a brief mild recession, likely to begin in early 2023. While the hope is that the U.S. will avoid an economic recession, it will depend on the Federal Reserve Board’s continuation of monetary policy tightening to combat inflation. The good news is that inflation levels appear to have peaked and begun to decline. The bad news is that Federal Reserve Board has made no indication that it will take its foot off the proverbial gas. 

Despite soft economic growth and rising inflation, leisure travel has continued to be incredibly strong. While 3Q2022 leisure demand set records for the lodging industry, it is also likely that was the peak for several years. Moving forward, industry growth will need to be fueled by the corporate and group segments. We remain optimistic that these segments will continue to recover, however they can be sensitive to economic downturns, creating a considerable amount of uncertainty heading into 2023.

Additionally, the corporate recovery will be somewhat dependent on the return to the office, which we expect to continue to gradually progress through 2023. Furthermore, while group attendance may be lighter than historically, the number of events is recovering rapidly, helping generate a base level of demand that will further support pricing power.

We continue to believe that the greatest disruption from the Covid-19 pandemic is in the past, but risk remains to short-term disruption tied to spikes in infection rates. However, we expect any further disruption(s) to be shorter and milder than experienced during prior spikes, unless a vaccine-resilient variant emerges. 

Our economic forecast from Moody’s Analytics makes the following key national assumptions:

  • The Fed will raise rates by another 50 bps in December and another 25 bps in early 2023.
  • Inflation will drop to under 3% by the middle of 2023.
  • U.S. GDP will decrease 0.1% in 4Q-2022 and increase 0.7% in 2023. 

One of the reasons that lackluster GDP growth has not had much effect on lodging demand and RevPAR growth is that the metrics are primarily assessed on a different basis. Lodging demand and RevPAR growth are measured on a year-over-year basis (i.e., 3Q-2022 RevPAR over 3Q2021 RevPAR, while GDP growth is measured on an annualized quarter-over-quarter basis (i.e., 3Q-2022 GDP over 2Q-2022 and annualized). However, analyzing data on a comparable basis (year-over-year growth rates) we notice that the historical relationships between national GDP and lodging demand and RevPAR generally held throughout the pandemic and during the recovery. 

While there have been limited data points, since the start of 2020, year-over-year U.S. GDP growth has had a 96.9% correlation with U.S. lodging demand growth and a 93.2% correlation with U.S. RevPAR growth. More importantly, the R-squareds are also very strong as yearover-year U.S. GDP growth has a 93.9% R-squared with U.S. lodging demand growth and an 86.8% R-squared with U.S. RevPAR growth. 

Year-over-Year Growth in U.S. GDP vs. Year-over-Year Growth in U.S. Lodging Demand and RevPAR

Source: Lodging Analytics Research & Consulting, IncSource: Lodging Analytics Research & Consulting, Inc
Source: Lodging Analytics Research & Consulting, Inc

U.S. lodging fundamentals across the country have not decoupled from economic activity as headline numbers might suggest. However, with muted GDP growth (on a year-over-year basis) moving forward, the data also points to a considerable slowing in lodging demand and RevPAR growth in 2023.

With this said, this cycle has generated lodging industry winners and losers that have had no relationship with MSAlevel economic output. In fact, across our 49 markets, 2022E RevPAR growth over 2019 levels has a 0.2% correlation with 2022E gross metropolitan product (GMP) growth over the same period. In other words, until now, economic growth has had little, if any relationship with outperformance or underperformance across given markets. For example, comparing 2022E vs. 2019 in San Jose, CA, RevPAR Growth is estimated at (28)% while Economic Growth (GMP) is estimated at 18%. Another example is Mobile, AL where 2022E RevPAR is expected to be up 27% over 2019 levels, while GMP is expected to be down 1% over the same period.

As this cycle moves into the next phase of growth, it would be wise not to rely on basic economic growth estimates or those factors that drove outperformance over the initial phase of the recovery. Instead, sector participants will need to deeply understand the local macro-economic drivers of lodging demand and pricing power to accurately assess market performance moving forward, particularly if they wish to take advantage of market dislocations that may occur in the near-term. LARC provides accurate, transparent, and detailed data to decipher between winning and losing markets. 

We continue to expect there to be U.S. lodging markets that materially outperform and those that underperform national averages. As the lodging industry shifts into the next stage of the cycle, where pent-up leisure demand is not the driver of growth, market winners and losers will begin to shift. We generally believe leisure markets will begin to cool, while international gateway markets should experience stronger growth however take the longest to fully recover to pre-pandemic levels. 

We believe the best business decisions are based on the best information available at the time of making that decision. We take that approach with our forecasts, using the best available information to provide the most likely outcome. As such, we believe transparency surrounding forecasting is critical to the lodging industry. 

LARC’s industry-leading market intelligence referred to throughout this document will help all industry participants navigate the current environment and position themselves for success as the recovery transitions to expansion. Please contact us directly to learn more about our services and products and if there is any other way we may be able to better serve you. 

LARC’s Industry Outlook

Currently, Lodging Analytics Research & Consulting (LARC) expects U.S. RevPAR to increase by 30.7% to $93.90 in 2022, resulting in an annual RevPAR that is 8% above 2019 levels. The recovery is driven by continued strength in ADR. LARC anticipates ADR to rise by 19.5% this year to $149.02, or 14% above 2019 levels, while occupancy will increase 9.3% to 63.0%. For 2023, LARC expects occupancy to increase 1.5% to 63.9%, ADR to increase 5.3% to $156.88 and RevPAR to increase 6.8% to $100.32. 

LARC does not expect occupancy to approach 2019 levels during this cycle. 

Despite challenging capital markets LARC anticipates 2022 U.S. Hotel EBITDA to grow by nearly 80% and hotel values to increase 12%. We believe that while values and Hotel EBITDA have already recovered to 2019 levels. 

December 2022 U.S. Hotel Industry Forecast Summary 

Source: Lodging Analytics Research & Consulting, IncSource: Lodging Analytics Research & Consulting, Inc
Source: Lodging Analytics Research & Consulting, Inc

LARC’s U.S. RevPAR model has an R-squared of 99.5% with a standard error of 4.9%, back-tested to 2000. LARC’s U.S. Cap Rate model has an R-squared of 98.4% with a standard error of 26 bps, back-tested to 2005. 

The following table illustrates a summary of LARC’s current U.S. Hotel Industry Outlook in contrast to last quarter’s outlook. Ultimately, our 2022 outlook for demand increased slightly, driving a modest improvement in RevPAR, Hotel EBITDA and Hotel Values. 

2022 U.S. Hotel Industry Forecast: December 2022 Edition vs. September 2022 Edition 

Source: Lodging Analytics Research & Consulting, IncSource: Lodging Analytics Research & Consulting, Inc
Source: Lodging Analytics Research & Consulting, Inc

Market Outlooks

Below is a list of the best and worst performing markets based on our forecasts. Similar to our U.S. forecast, our market level forecasts are built entirely on multi-variable regression models with high historical accuracy. 

More detail on our market outlooks can be found in LARC’s Market Intelligence Reports. Please contact us if you are interested in purchasing any of LARC’s offerings. 

2023 (relative to 2019)
Top Markets for RevPAR Growth:
Palm Beach, Puerto Rico, Miami, Phoenix and Orlando

Bottom Markets for RevPAR Growth:
San Francisco, San Jose, Portland, Cincinnati and Columbus, OH

2023 (year-over-year)
Top Markets for RevPAR Growth:
San Francisco, San Jose, Houston, Minneapolis and Washington, D.C.

Bottom Markets for RevPAR Growth:
Tampa, Mobile, Omaha, San Antonio and Palm Beach

2019 - 2026 Outlook
Top Markets for RevPAR Growth:
Las Vegas, Puerto Rico, Palm Beach, Tampa and Orlando

Bottom Markets for RevPAR Growth:
San Francisco, Portland, Cincinnati, San Antonio and Louisville

Top Markets for Value Change:
Puerto Rico, Tampa, Phoenix, Los Angeles and Houston

Bottom Markets for Value Change:
San Francisco, Portland, San Antonio, Boston and New York 

Ryan Meliker
President
Lodging Analytics Research & Consulting, Inc