Inflation snapshot

Economic headwinds: Hospitality

Inflation is hitting the hospitality industry harder than the broader economy

Jul 07, 2022

Key takeaways

Hospitality’s labor challenges call for new ways to attract and retain employees.

Hotel rooms are up 22% from a year earlier through May on an annualized basis.

Inflation and rising interest rates are limiting returns on hotel transactions.

Inflation Real estate

The hospitality industry is faring worse than the overall economy.

It can be argued that the hospitality industry has experienced the worst recovery of any sector of the U.S. economy. Supply chain and labor constraints have hurt hotel operations, and rising interest rates have stymied capital investment and acquisitions of hotel properties. The unemployment rate for hospitality is elevated, reaching 5.1% in May, compared to the broader economy’s rate of 3.6%.

The industry now struggles with the limited availability of supplies required to support guest services. Demand recovery continues to provide green shoots for investors and operators, but the hotel business model will need to change rapidly to address shortages in goods and talent.

By the numbers...

The average daily room rate of $155 for the week ending June 11 is the second-highest on record since hospitality analytics firms started tracking rates in 2000. Travelers have been mainly undeterred by the inflationary costs of travel, but the onset of a recession may rapidly reverse this trend.

The top challenge for the hospitality industry in a slowing economy is labor.

The U.S. economy added 390,000 jobs in May, with hospitality contributing about 84,000. The bigger picture, however, is that hospitality has lost over 7.5 million jobs since March 2020, the start of the pandemic. Even with 6.9 million jobs added back in that time period, the sector shows a net loss of 600,000 jobs. By comparison, all other major sectors have experienced net job additions. Hospitality jobs will likely not return, as the favorable labor market lures workers to other sectors with competitive perks. If the unemployment rate ticks up due to recessionary pressures, the hospitality industry is likely to suffer greatly.

Cap rates present another challenge to the sector.

Cap rates, or the rate of return from investment after fees and leveraging costs, were nominal in the real estate industry before the pandemic. The resulting increases in interest rates are further squeezing the profitability of hotel transactions, which in turn slows investment in the hotel sector. There is potential for deployment of dry powder from acquisition funds to acquire hotel properties with less leverage, but other areas of real estate may appear safer to private equity funds.

Hospitality is focusing on an improved work experience to mitigate labor challenges.

Hotel owners and operators are looking for opportunities to attract new talent and maximize existing staff within their organizations. Data from the U.S. Bureau of Labor Statistics shows wage growth within hospitality has been the most significant of any sector of the economy, up about 15% since March 2020, compared with roughly 9% in the broader economy. But increased wages are not sending qualified workers back to hospitality. Flexibility, culture, upward mobility, and ancillary benefits such as education stipends and paid health care premiums are emerging as key drivers to attract and retain talent to hotel properties.

Other top considerations to offset the impact of headwinds facing hospitality:

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Industry inflation snapshots

Hampered by rising inflation, geopolitical uncertainty and supply chain disruptions tied to the COVID-19 pandemic, the U.S. economy contracted in each of the first two quarters of 2022.

RSM economists peg the chance of a full-blown recession over the next 12 months at about 65% (as of October 2022); an economic slowdown of any measure creates significant challenges for middle market companies. We took a look at the potential impact on several industries.