By Morag McKenzie
With borders re-opened to travel, pent-up demand has resulted in strong hotel operating performance and demand across all regions and sectors in 2023. This is expected to continue through the balance of 2023-2024 with project construction and conversion pipeline projected at two to eight per cent following relatively flat growth for three consecutive years. The three regions with the strongest projected growth are the Middle East, Asia Pacific and United States.
Demand and growth vary by region as affected by global and regional factors, including changing lifestyles, high financing costs, supply challenges, increasing operating costs and environmental challenges.
Blurring The Lines
Driven by the growing evolution of the work-from-home mobile lifestyle, hoteliers are investing in non-traditional hospitality concepts, blurring the lines between hotels, long-term stays, residential and co-living. “Service-level apartments have continued to grow in popularity in the luxury and premium markets as it brings a certain cache to the address and provides both short- and longer-term guests with all the resort-style amenities they are looking for. It also diversifies the risk to the developer,” states Bruce Ford, SVP, Lodging Economics.
As one of the world’s largest hospitality companies, Accor operates 5,400 locations in more than 110 countries. Agnès Roquefort, Chief Development Officer-Luxury & Lifestyle says, “Our Fairmont and Raffles residential brands, which offer mixed-use living have grown 170 per cent since 2010. Our recently opened Raffles Boston is an excellent example of this, as 50 per cent (146) are branded residence and the balance (147) are hotel rooms. Both brands have very strong F&B, wellness and other resort-style amenities and experience strong demand for both lifestyles.”
High Cost of Financing
Global interest rates remain high, making obtaining the financing required for new builds increasingly difficult to obtain and maintain. “While strong global demand and operating performance have given investors’ confidence in the hotel sector, the high cost of debt and scarcity of funding remains a significant issue for the U.S. and Europe. The only exception to this is the Middle East,” explains Roquefort.
The confluence of these factors has led to an explosion in growth of conversions and renovations of existing buildings. This is particularly true in the luxury and premium market as it can take three to five years for a new build to open. More than 50 per cent of growth in our premium brands will come from conversions, primarily from independents or another brand,” adds Camil Yazbeck, Global Chief Development Officer, Premium, Midscale & Economy, Accor.
He adds, “Independent-hotel owners barely had a chance to recover from the pandemic and are now facing new challenges from labour shortages, spiking supply costs and rising interest rates, so the support of a global company like Accor is very compelling.”
Leaner and Greener
While the Environment, Sustainability and Governance (ESG) has been top of mind for hoteliers for many years, it has now become a key differentiator and growth driver for many brands. An excellent example of that are SH Hotel’s 1 Hotels. “As a mission-driven lifestyle hotel brand inspired by nature, 1 Hotels cultivates the best of conscious design, architecture, lifestyle and sustainable operations. 1 Hotels has experienced tremendous growth, including our flagship property in Hanalei Bay (Kauai), and Mayfair (London),” explains Abhay Bakaya, SVP, Development, SH Hotels & Resorts.
ESG has become even more critical in hotel growth and development as mounting research and financial tools now allow hotels to more effectively measure ESG’s impacts. This will allow it to be reflected in a hotel’s valuation — good news for operators who have made a long-standing and deep commitment to maintaining the highest standards at their properties.
Increasing concern about climate change and its impacts, high energy and other operating costs will also force hoteliers to invest in new technologies, energy reduction and elimination of unnecessary services leading to more efficient and sustainable operating models.
Be Local — Globally
Today’s hotel guest is looking for much more than a room — they’re looking for an experience that reflects the local foods, community and culture of the area they are visiting. This is particularly true in mature and unique markets such as Europe, the U.S. and Asia-Pacific.
Leading global hoteliers are recognizing this, adding brands to their portfolio that celebrate the unique nature of an independent hotels’ architecture, design, culture and location. “Our Handwritten Collection celebrates the unique charm and personality of each hotel, their community and the people that look after them. We have two hotels open with secure signings and pipeline leads for approximately 100 more,” explains Yazbeck.
Growth in the Middle East
The Middle East has become one the world’s fastest-growing tourism destinations — hosting major cultural, religious, and sporting events — which has helped propel demand and occupancy throughout the region. As stated by Lodging Economics, countries in the Middle East with the greatest number of projects are Saudi Arabia (260 projects/70,069 rooms) and United Arab Emirates (UAE) with 108 projects/28.973 rooms.
The cities of Dubai, Riyadh, Jeddah and Doha account for 52 per cent of this growth. “The Middle East is a true showcase for complex luxury and midscale development as clients are looking for holistic experiences. We are also seeing growth in all-inclusive resorts and very large (400+ rooms) hotels as tourism becomes more significant every year,” explains Roquefort. “It is also under-serviced in terms of supply.”
The largest brands in Middle East pipeline are Hilton’s upscale DoubleTree brand followed by Accor’s Novotel and Marriott’s Courtyard.
Sporting Events Drive European Markets
Another positive year is projected in 2023-2024 for European markets as a result of increases in Average Daily Rate (ADR). Paris is expected to lead this growth, hosting major events including the Rugby World Cup and Summer Olympics in 2024. Simon Vincent, EVP and president, Europe, Middle East & Africa, Hilton, said, “We’re experiencing record growth in France, with 2023 set to be a historic high for hotel openings. As a key market for Hilton, we’re focusing on developing hotels in regional French towns and cities, the south coast and continued expansion in Paris as France gets ready to host major global sporting events.”
This has helped offset the negative impact of supply-chain challenges, labour shortages and inflation. Concern remains over a potential recession and the effects of Russia’s war with Ukraine, which could result in less disposable income for consumers. However, forecasters expect an increase in business and meeting travel should offset any potential slowdown in leisure demand.
Lodging Economics reports that these factors have led the region’s hotel construction pipeline to stand at 1,776 projects/226,901 rooms. Of this, approximately 45 per cent are under construction and 25 per cent are projected to start within the next year. And while new construction continues in Europe, conversions are also a key driver of growth. “Conversions are a one-stop investment as they provide bespoke F&B concepts, procurement, marketing and our powerful Accor loyalty programs. Europe is ripe for conversions as they are known for the quality, uniqueness and number of independents,” adds Yazbeck. The European construction pipeline is led by United Kingdom, Germany and France followed by Portugal and Turkey.
Asia Pacific Growth Remains Steady
The outlook for Asia Pacific looks bright in 2023, as the return of travellers from mainland China drives regional performance and results in a projected full recovery by 2024. Asia presents a $10-trillion consumption growth opportunity with more than one billion Asians set to join the middle class by 2030. This burgeoning middle class is expected to be value-driven, making regional expansion of mid-upscale hotels timely. “Hilton Garden Inn hits a sweet spot for owners and travellers alike in terms of value and quality. In Asia Pacific there are 85 properties in operation with over 100 in the pipeline,” explains Clarence Tan, SVP Development, Asia Pacific, Hilton.
Pent-up travel demand continues for major tourist hubs (mainland China, Japan and Hong Kong) as each re-opened borders to the rest of the word. Markets such as Australia, Korea, India and most of Southeast Asia have been open for travel since 2022 and have already seen hotel performance surpass 2019 levels.
Lodging Economics reports India leads the region with the largest pipeline at 427 projects/51,350 rooms, increasing 35 per cent by projects and 26 per cent by rooms YOY compared to 2022. Vietnam and Indonesia follow, with these three countries accounting for 46 per cent of the Asia-Pacific (excluding China) pipeline.
Cities with the highest growth are Bangkok (Thailand) followed by Jakarta (Indonesia), Melbourne (Australia) and Kula Lumpur (Malaysia).
China Growth Resumes The re-opening of mainland China’s borders will affect the global travel industry as the Chinese are responsible for up to 40 per cent of travel in Asia-Pacific, Europe and beyond.
Lodging Econometrics reports construction pipeline at 3,659 projects/680,959 rooms, which is down one per cent and three per cent respectfully. However, while counts may be down, both domestic and international travel is gaining significant momentum, which is expected to continue through 2023 and 2024. Cities in China with the largest pipelines include Chengdu, Shanghai and Guangzhou.
Bolstered Demand and Rates in the U.S.
Hotel occupancy and operating fundamentals in the U.S. are returning to near pre-pandemic levels as record-low unemployment, modest consumer debt and flexible work have driven demand and rates. Another catalyst for a strong U.S. travel season is a weaker U.S. dollar and 29 per cent increase in international air fares. Forecasters predict strong topline growth of 5.8 per cent for 2023 combined with healthy operating profit and healthy demand. Marriott (1,499), Hilton (1,436) and IHG (809) continue to dominate the U.S. construction project market.
The U.S. also had a record-high conversion pipeline of 1,079 properties. “In key gateway cities there is real opportunity to grow through conversions as they might take six to seven months to complete while new builds can take three to five years. They are a real growth opportunity in mature markets like the U.S., Europe and Asia,” adds Ford.
Growth in Latin America/Caribbean
While new construction pipeline grew two per cent by projects and three per cent in rooms in Latin America in 2023 to 549 projects/90,139 rooms, it is down three per cent and two per cent YOY. Top cities include Mexico City (Mexico), Riviera Maya (Mexico) and Lima (Peru).
Increasing flexible work patterns and group travel demand has driven continued growth for all-inclusive resorts in the Caribbean by 75 per cent in new construction in recent years. Growth in Latin America continues to be driven by renovations and conversions which rose 22 per cent by projects. The luxury and premium markets dominated these renovations and conversions.