- Hotel returns are influenced by inflation through pricing, substitution effects, and interest rates.
According to the St. Louis Federal Reserve, the US Consumer Price Index (CPI) exceeded its 2020 level by more than 7% in December 2021, the greatest rate since the 1980s. This sharp increase has reignited debates about the consequences of rising inflation.
Hotels have been discussed as an inflation hedge due to their unusually short lease durations, measured in days rather than months or years. Hotel managers may theoretically modify pricing quickly to account for any short-term fluctuations in inflation. Is it possible for hotels to utilize this strategy to protect themselves against inflation?
Since 2000, Figure 1 depicts the approximate, positive link between inflation and nominal average daily rate (ADR) and revenue per available room (RevPAR). The ADR swings are significantly bigger than inflation, and the varied scales of the series understate their magnitude. While deflation is an uncommon and brief occurrence, ADR declines can be large and long-lasting. Inflation slowed to a halt in 2015, although ADR and RevPAR increased significantly. Inflation rose after that, although ADR and RevPAR fell. Until the shock of the COVID-19 pandemic in 2020, this tendency persisted.
Figure 1: ADR and Inflation Mostly Move Together
The ability to price to inflation would be indicated by a close relationship between inflation and nominal rates. ADR and inflation have a correlation coefficient of =0.54 and RevPAR and inflation have a correlation coefficient of =0.55. This indicates a moderately positive link.
There is a high correlation between real returns, i.e. nominal returns minus inflation, and real GDP growth. This link is depicted in Figure 2. With a correlation of 0.70, these variables have a stronger relationship than inflation and ADR. In general, it appears that hotels are able to withstand inflation. Fluctuations in ADRs are modeled after broader price changes, and the pattern of returns is modeled after the actual economy.
What does history tell us?
Historical research has revealed a more nuanced picture of hotels than simply inflation-adjusted rates. Avner Arbel and Robert H. Woods (1991)1 looked at hotel performance between 1975 and 1989, when there was a lot of inflation. They came to the conclusion that adjusting prices too closely to the rate of inflation reduces returns over time, because higher prices result in lower occupancy during periods of high inflation. Because not all costs are affected equally by inflation, people are sometimes hesitant to travel when faced with a rising cost of living. The impact of inflation on hotel profits has received less attention in recent years. Concerns about high rates or stagflation had been pushed to the back of operators’ minds for three decades, until the recent spike in consumer prices.
The challenge for investors now is whether today’s conditions will resemble those of the previous century, and how contemporary hotels will respond in the face of temporary or chronically high inflation. Consider not only ADR, but also the effect on occupancy and the subsequent passthrough to net operating income to assess if the “hotels as hedge” theory is plausible (NOI).
Arbel and Woods also recommend using GDP and the currency rate to compensate for confounding effects that may occur at the same time as inflation and hotel performance. To distinguish the direct effect of inflation from long-term general fluctuations in both variables, Arbel and Woods include a factor in ADR that accounts for a long-run linear trend (time trend).
In a study of non-hotel property types, EA economists Neil Blake, Matt Mowell, and Jing Ren (2021) found that inflation has an impact on interest rates. These factors can have an impact on capitalization rates and, as a result, property value. When determining whether hotels can be an effective inflation hedge, the complete return on investment, including value appreciation or depreciation, should be evaluated.
An economic model for real returns and inflation
We develop an econometric model for the United States and the six chain scales to isolate the influence of inflation among different hotel scales while controlling for various confounding factors. The dependent variable is the real rate of return, which includes both real NOI and real appreciation. This information originates from the EA Hotel Investment Performance series, which combines Trends3 data to estimate NOI and CBRE and RCA transaction data to track cap rates. As controls, EA incorporates GDP, CPI, and exchange rate growth rates, as well as a temporal trend and lagged real return. For the years 2000 through 2021, the data comes from the Bureau of Labor Statistics (BLS) and the Bureau of Economic Analysis (BEA). Figure 3 summarizes the outcomes of this model.
Figure 3: Results of Multivariate Regression
Except for the economy, all chain scales have a strong positive association with GDP. Despite the fact that the predicted benefit for cheap hotels is positive, it is statistically negligible. When the economy falters, economy hotels may benefit as more people look for a cheap place to stay. Because economy hotels have the only negative effect on inflation, this substitution effect may come at the expense of price inflexibility. This means that economy hotels may not be able to keep up with inflation by raising costs.
The inflation effect, on the other hand, is statistically significant mainly in premium hotels. In fact, luxury hotels appear to gain directly from inflation, possibly as a justification for raising costs for a less price-sensitive clientele. The favorable impacts of upper midscale and premium hotels are large, but there is too much statistical noise to attribute much significance to these effects. In essence, the real profits on these chain scales are unaffected by inflation. Only luxury hotels appear to have significant promise in this regard if an investor is attempting to offset or hedge losses from inflation-sensitive assets.
The fact that luxury hotels have a significant positive coefficient on the US exchange rate defies conventional wisdom. Exchange rate hikes, according to Arbel and Woods (1991), have a negative effect since a stronger dollar makes foreign travel cheaper in relative terms. International travel was restricted during the COVID-19 epidemic, and the dollar increased at the same time, yet the effect is still positive and large when this era is excluded. The impact on exchange rates and possibly inflation could be explained by the fact that these variables are positively connected with economic strength not accounted for by GDP growth alone. This study looks at broad national U.S. aggregates where international travel accounts for a small percentage of overall lodging revenue, and these aggregates may be unaffected by international travel. San Francisco, New York City, and Miami are three U.S. areas where foreign travel plays a substantially larger role. The effect could be mitigated or reversed in certain markets.
Importantly, this model takes into account the period following the year 2000, when inflation was quite low. This model is expected to have explanatory power because we predict inflation to have peaked and be slowing. On the other hand, if inflation continues to rise to high levels experienced in the 1970s and 1980s in 2022, these results may not hold. Furthermore, the model’s timescale excludes any substantial periods of high inflation and low growth, known as “stagflation.” Under stagflation, the relationship between actual returns and inflation may seem very different.
Conclusion
CBRE Inflation is expected to peak in Q4 2021, with CPI rise of 6.8% year-over-year, according to EA (Y-o-Y). Inflation is expected to stay elevated in the first half of 2022, according to EA. In Q1 and Q2 2022, CPI will climb at or above 5% Y-o-Y before settling at long-run average levels of around 2% by 2023. EA also anticipates GDP to expand at a rate of over 4% for the entire year of 2022. This simultaneous high level of inflation and GDP growth, according to the model given in this study, should yield huge returns in luxury hotels, beyond the expectations of a model that does not account inflation.
Increasing labor costs as a major component of inflation may be a drag on our forecasts. If hotel labor costs are rising at a greater rate than in prior inflationary periods, the drop in NOI may reduce income return and hotel value, canceling out some of the additional total return that would otherwise be earned in an inflationary period with economic expansion.
The inflation rates studied for this study are mild, ranging from 0% to 7%. In comparison to the double-digit rates of the 1970s and 1980s, these rates are still low. Furthermore, recent inflation has often accompanied GDP growth. The rapid pace of GDP recovery has also contributed to recent highs in inflation growth due to global supply chain disruptions. During the same time period, the hotel business has been rapidly recovering.
While much regarding the modern relationship between lengthy periods of high inflation and poor GDP growth, known as stagflation, is unknown, this analysis provides some broad characterizations. Most hotels receive no gain or harm from inflation during periods of low or moderate inflation. The returns are influenced by the real economy. There is some evidence that cheap hotels are less able to price to inflation, but there is far more evidence that luxury hotels can benefit from greater inflation rates. As a result, luxury hotels appear to be the most likely candidate for inflation protection. Furthermore, the relationship between exchange rates and this upper tier of hotel demand may be shifting away from past assumptions, as returns have risen in reaction to a stronger dollar.
- “Inflation and Hotels,” by Avner Arbel and Robert H. Woods. “The Price of Sticking to a Bad Routine.” Cornell Hotel and Restaurant Administration Quarterly, vol. 31, no. 4, pp. 6676, February 1991.
What impact does rising inflation have on the hotel and tourism industry?
What impact does rising inflation have on the hotel and tourism industry? Tourists have more disposable income. The purchasing power of tourists dwindles. Employers in the hospitality and tourist industries are increasing.
What impact does inflation have on a business?
- Inflation is the rate at which the price of goods and services in a given economy rises.
- Inflation occurs when prices rise as manufacturing expenses, such as raw materials and wages, rise.
- Inflation can result from an increase in demand for products and services, as people are ready to pay more for them.
- Some businesses benefit from inflation if they are able to charge higher prices for their products as a result of increased demand.
What factors influence the hotel industry?
The hospitality and tourist industries are influenced by a wide range of factors. Natural disasters and weather variations, as well as transportation services and consumer protection legislation, all influence how hotels, motels, and resorts operate.
Why have hotel prices increased?
Everything is more expensive right now, including hotel rooms, which is unpleasant for holiday travelers.
The average daily room rate, or ADR, for the week of July 4 was $139.84 5.4 percent more than the similar week in 2019.” According to USA Today, the price of a hotel room has touched a record high this year, thanks in part to pent-up demand.
According to AAA, hotel prices have been steadily rising over the summer, with average nightly rates ranging between $137 and $172 for AAA Approved Hotels.
Are hotel prices fluctuating?
To automatically change their hotel room rates, most hotels use revenue management software and other algorithms. If you search for the same place on different dates, you’ll find that hotel prices fluctuate from day to day.
Hotels can use revenue management software to predict when demand will be high or low. Prices are automatically reduced during periods of low demand to tempt guests to book unoccupied rooms. Hotel prices, on the other hand, automatically rise during important local events or during peak vacation season, so expect the highest prices then.
Some of the elements that influence hotel pricing can help you decide when is the ideal time to schedule your stay.
When a destination’s hospitality and tourist firms continue to draw visitors, what is the normal outcome?
When a destination’s hospitality and tourist industries continue to draw visitors, what is the normal outcome? The local economy is booming. Which method has resulted in the interdependence of travel and tourism activities among countries in order to develop their economies?
What is a factor in the travel and tourist sector that drives demand?
Culture, peace, security, the world’s established infrastructure, visa facilities, natural beauty, people’s attitudes, tourist numbers, quarantine, the world’s population, education, and so on are among these variables. The level of income, the price of various goods throughout the world, the number of languages spoken, and the cost of a hotel room, among other things, are all factors to consider.
What were the three effects of social tourism?
Tourism has numerous social benefits that demonstrate beneficial societal impacts. Protecting local culture and heritage, strengthening communities, providing social services, commercializing culture and art, revitalising customs and art forms, and preserving heritage are some examples.
Preserving Local Culture
Tourists come to Beijing to learn about Chinese dynasties. Tourists go to Thailand in order to sample traditional Thai cuisine. Tourists flock to Brazil for a variety of reasons, including the Rio Carnival, to name a few…
Many places will make a concerted effort to maintain and protect the culture of the region. This frequently contributes to natural resource conservation and sustainable management, the preservation of local heritage, and the revitalization of indigenous cultures, cultural arts, and crafts.
In some ways, this is fantastic! Globalization is limited, and cultures are retained and protected. BUT, I have to ask if this is always the case. We no longer wear Victorian corsets or carry smoke pipes…
Our social environments have shifted dramatically over time. And this is a natural element of the process of evolution! Is it therefore appropriate to want to preserve a region’s culture for the sake of tourism? Should we allow them to evolve and grow like we do? I suppose it’s something to think about…
Strengthening Communities
In response to visitor interest, events and festivals in which local inhabitants have been the major participants and viewers are frequently revitalized and developed. When I went to the Running of the Bulls celebration in Pamplona, Spain, I definitely felt this way. The ambiance and vibe of the community were incredible!
Tourism-related occupations can provide a significant boost to the local economy. Aside from the economic benefits of increased employment opportunities, those who have jobs are happier and more social than those who do not.
Through tourism-related professional training and the development of business and organizational skills, local people can increase their influence on tourist development while simultaneously improving their job and earnings prospects.
What three impacts does inflation have?
Inflation lowers your purchasing power by raising prices. Pensions, savings, and Treasury notes all lose value as a result of inflation. Real estate and collectibles, for example, frequently stay up with inflation. Loans with variable interest rates rise when inflation rises.