Lower-Income Americans Reduced Hotel Bookings In April, Lowering The Industry's Outlook

Travel spending by lower-income Americans declined in April as reduced savings, higher credit card delinquencies, and inflation squeezed household budgets, according to data from the commercial real estate analytics company CoStar.

While wealthier individuals continued traveling, those with lower incomes booked fewer hotel stays across the United States. In light of this slowing demand from cost-conscious travelers and a cooling GDP outlook, CoStar revised downward its forecast for the hotel industry's performance this year.

Overall U.S. hotel room demand fell 0.5% in April driven by weaker demand for midscale and economy hotel options. Room demand declined around 2.7% for midscale hotels and 3.9% for economy hotels that month. The key industry metric revenue per available room also dropped 1.7% for midscale and 3% for economy properties.

The diminished travel appetite among lower-income groups reflects rising living costs that are straining household finances in that cohort. Total U.S. household debt rose $184 billion or 1.1% in Q1 to $17.69 trillion, according to the Federal Reserve Bank of New York, now $3.5 trillion above pre-pandemic levels.

Incorporating this cooling demand, CoStar now forecasts a more modest 2.1% rise in average daily room rates for 2024, down from its prior 3.1% projection. Revenue per available room growth is expected to slow to 2% from earlier 4.1% estimates. Hotel occupancy rates are projected to dip slightly to 62.8% after holding at 63% in 2023.

Widening Wealth Gap Impacts Travel

The diverging travel patterns between higher and lower income Americans showcased in April's data point to the increasing wealth inequality in the United States. While the affluent continue to spend on discretionary travel, those with tighter budgets are being forced to cut back on such expenditures as the cost of necessities rises.

This echoes wider national trends of a growing wealth gap exacerbated by the pandemic's uneven economic impacts. Federal Reserve data shows that the wealthiest 10% of Americans owned roughly 70% of total household wealth in 2021, up from 60% in 1989. Median household wealth has grown at a much slower pace.

Factors like stock market gains, rising real estate values, and the resilience of white-collar jobs during the pandemic have disproportionately benefited higher-income cohorts. In contrast, many lower-wage workers experienced job losses, stagnant wages, and rebuilding costs from depleted savings during the crisis years.

As inflation outpaces wage growth, the financial strain on lower-income households intensifies. They face stark trade-offs in allocating limited funds as the costs of housing, food, healthcare, and other essentials continue rising rapidly. Discretionary expenses like travel and dining out become harder to justify.

This affordability crunch extends to the type of hotels booked as well. The sharper declines in economy and midscale hotel demand versus higher-end properties underscores how inflation impacts different income brackets to varying degrees. Budget-conscious travelers likely shifted to even more affordable options like motels or holding off on trips altogether.

Uneven Consumer Resilience Tests Hotels

While the latest data suggests the hotel industry's strong pandemic rebound is losing some steam, performance still remains above pre-COVID levels overall. The sector has proven remarkably resilient so far in recapturing demand as travel resumed. However, sustaining momentum will hinge on how consumer behavior across income tiers evolves.

High-end hotel demand from wealthier leisure and business travelers has been robust, buoyed by ample savings amassed during the pandemic. The rapid bounce-back in luxury bookings offset initial softness in other hotel categories and underpinned the overall industry recovery to this point.

But with economic headwinds mounting and consumer sentiment souring, some hotel operators worry the upper tiers' resilience could be tested as well if a sharper pullback in discretionary spending takes hold. Continued strength in this lucrative segment remains crucial even as it grows increasingly polarized from the budget-conscious masses scaling back travel.

At the same time, protracted stagnation for economy and midscale hotels could spell trouble down the road. While they generate lower revenue, these properties rely on consistent volume to maintain profitability. A extended downturn in demand from cost-conscious travelers would put significant financial strain on ownership groups and operators within these categories.

How nimbly hotels can adapt pricing, promotions, and operating models to retain budget travelers while still capturing high-end demand will likely separate winners from losers. An overarching industry concern is how long the widening wealth gap drags on prospects for a full, balanced travel recovery across all consumer segments.

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Source: Yahoo Finance