luxury hotel resort lobby

The hospitality sector, in particular, is sensitive to current challenges in the broader economy: rising interest rates, higher inflation and a tight labor market.

NB: This is an article from RSM

Even so, the industry is making strides in the post-pandemic new normal as the focus shifts to high-end, experience-rich destinations in the luxury segment. In the early days of the pandemic, coastal and resort hotels with lighter restrictions benefited from travelers escaping quarantine.

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Economy and extended-stay properties, which accommodated essential workers in need of refuge, fared better than amenity-rich properties hurt by concerns around social distancing. Three years later, upscale properties are now leading a rebound, having enjoyed a renaissance built on steady room rates, distinctive accommodations and an affluent market that is less price sensitive in an inflationary economy. The luxury segment is expected to remain robust amid the broader economic slowdown.

Luxury rates and consumer expectations fly high

As consumer preferences have shifted from goods to services, more travelers seek unique lifestyle experiences, and the hospitality sector appears to be meeting demand. According to data analytics firm STR, U.S. hotels reached 62.8% occupancy in early March, exceeding 2022 levels and tracking close to 2019. Room prices are up, with the average daily rate 14% higher than in 2019 at $151 and revenue per available room (RevPAR) 8% higher at $95.

Having learned from mistakes made during the global financial crisis of 2007-2009, owners and operators of upscale properties maintained their rates through the pandemic downturn to preserve pricing power. As a result, when restrictions were lifted, and travel began to normalize, guests were used to paying daily rates without a significant discount. A reduced labor force and limited room supply allowed luxury hotels to maximize their margins and recover more quickly. By August 2021, RevPAR was even with 2020 levels and by December 2021, it had more than doubled. We expect the trend to continue throughout 2023 as the focus on wellness and healing, fresh dining options, unique excursions and sustainability continue to help the luxury space.

Labor gaps result in diminished hospitality experience

As demand returns for all hotel segments, owners and operators are battling an ongoing labor crisis. Even though hospitality job reports have consistently been favorable, the composition of workers in the market leaves the industry searching for talent. According to the U.S. Bureau of Labor Statistics, employment increased by 311,000 jobs in February, including 105,000 positions in leisure and hospitality, consistent with an average monthly jobs gain of 91,000 since April 2020. Despite these gains, job openings in the sector rose to 1.7 million available positions through February 2022, as filling available roles remains challenging, and some workers previously committed to the sector have fled for opportunities in other industries. Labor market stress is reflected in record pay rates of roughly $20 per hour and an inability to match open jobs to workers with appropriate skills. As hiring costs rise for entry-level and middle-management positions, higher labor dollars reduce hotel profit margins at the expense of a diminished hospitality experience.

Read rest of the article at RSM