U.S. Hotel Tax Changes: Hospitality Industry Trends in 2024

Tourism promotion and hotel tax: Is that an oxymoron?
Avatar of Juergen T Steinmetz

The Tax situation for the US Hospitality industry is changing.
Consumer preferences change. Through it all, people travel if they can, how they can, where they can.

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During the height of the pandemic, once travel was permitted, many shirked hotels and flocked to short-term rentals. Travelers shunned cities and visited beaches, islands, mountains — anywhere with elbow room that allowed for an escape from the homes where we lived/worked/schooled/recreated. Over 75% of hotel rooms in the U.S. were unoccupied in April 2020, and in August 2020, occupancy rates in urban hotels were down more than half nationally compared to August 2019.

Now the pendulum has swung in the other direction. Hotels are filling, especially in cities. Average U.S. hotel occupancy in 2023 is on track to reach 63.8%, close to the pre-pandemic level of 65.9%; and from the beginning of the year through September 5, 2023, hotel occupancy in New York City averaged 87.5% of capacity. On the other hand, strong supply growth could very well depress occupancy rates for short-term rentals in 2023 and 2024.

Business travel is contributing to the rise in hotel occupancy rates. According to the State of Travel 2023 report by Skift Research, 56% of business travelers surveyed in March 2023 had traveled more in the past six months than before the start of the COVID-19 pandemic, while only 21% had traveled less. Yet business travel isn’t likely to return to 2019 levels until late 2024 or early 2025.

Flexible/hybrid working situations are allowing people to travel more and stay longer, leading to an increase in bleisure (a blend of business and travel): Global spending by bleisure travelers is expected to more than double by 2027 ($360 billion) as compared to 2021 ($150 billion). Skift reports that some companies are even changing policies to meet their employees’ bleisure expectations. Per their research: 

  • 46% offer flexible work hours
  • 54% encourage employees to take personal time before or after a business trip
  • 34% reimburse some personal vacation expenses (up from 26% in 2021)

Recognizing this, a growing number of hotels cater to guests’ business needs, offering co-working and meeting spaces, lobby parties, and private dining events. Perhaps as a result of these policies, 30% of the U.S. business travelers surveyed by Skift traveled for an extended time (more than 10 days) away from home.

Yet there’s conflicting data on business travel recovery. Rising inflation is putting a damper on travel spending, according to Skift. Meetings that once (i.e., before the pandemic) seemed like they had to be held in person now seem just fine over Microsoft Teams or Zoom. Given these and other considerations, it may be a while before business travel spending fully rebounds.

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SOURCE: Skift

And indeed, business travel outlooks are somewhat pessimistic: About 25% of U.S. business travelers surveyed and more than 50% of U.K. business travelers surveyed believe “it is highly unlikely that [business travel] will reach 2019 levels ever again.”

Still, as we noted at the start, the desire to travel runs strong right now.

Though 60% of U.S. consumers surveyed by Skift said inflation would impact the way they intended to travel, they’re still prioritizing travel spending over other discretionary items like alcohol, eating out, and luxury goods. In fact, only 5% of the survey respondents planned to cut travel/transportation expenses in Q1 2023. Moreover, lodging spending increased 43% year over year from February 2022 to February 2023.

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SOURCE: Mastercard SpendingPulse

What the numbers tell us about the lodging industry

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SOURCE: STRI

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SOURCE: NLC

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SOURCE: Skift

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SOURCE: Skift

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SOURCE: Skift

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SOURCE: Grand View Research

Hotels are back (oh, yeah)

Skift predicts hotel revenues to be extremely close to pre-pandemic levels in 2023, just 1% below 2019 levels. This is a marked improvement over hotel revenues in 2022, which were 8% lower than in 2019.

But revenues don’t tell the whole story.

Though average daily rates (ADR) and occupancy rates usually recover in pace with each other, their paths are diverging. Revenue per available room (RevPAR) was up 8% from 2019 to 2022 in North America, and ADR was up 14%, yet occupancy was down 5%. The higher daily rates are helping bring hotel revenue nearly back to 2019 levels despite still-depressed occupancy rates.

Fast-forward to September 2023, and U.S. occupancy is showing signs of significant growth. The U.S. hotel industry sold a near-peak number of rooms that month.

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SOURCE: CoStar

Short-terms rentals are still going strong (mostly)

The hotel sector has historically outperformed short-term rentals (STRs) — pandemic aside — and it’s on top again today with 85% market share. But “short-term rentals are closing the gap with hotels.” STRs nearly doubled their share of the market in just six years, from 8% in 2018 to about 15% in 2023. According to Skift, short-term rentals are now a $67-billion market in the U.S., comprising 18.6% of the overall accommodation sector.

The STR industry actually defied predictions of an “Airbnbust” during the first half of 2023. If strong supply growth leads to a second year of declining occupancy in 2023, rates likely won’t drop as much as once expected. Indeed, occupancy should remain higher than pre-pandemic standards for the foreseeable future. While supply has grown steadily since before the pandemic, AirDNA (via Skift) says talk of “oversupply” seems unwarranted.

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SOURCE: AirDNA

This isn’t to say there haven’t been bumps in the road. The excess of STR supply has driven down average nightly rates: Though nightly bookings nationwide increased 9% year over year in July 2023, RevPAR dropped 2.3% year over year, to $235.50.

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SOURCE: AirDNA

Speaking at the Skift Global Forum in September 2023, Airbnb Co-Founder and CEO Brian Chesky admitted a lot of Airbnbs are “running at very low occupancy, maybe 20% or 30%.” He noted that charging a little less per night could help increase occupancy.

Fewer bookings at STRs doesn’t necessarily translate to more bookings at hotels, or vice versa. The truth is, hotels and STRs both have a lot to offer. There’s overlap between hotels and Airbnb, observed Chesky, but less than you might think.

That could be changing.

Hotels and STRs are learning from each other

Hotels and STRs generally coexist peacefully and serve different needs, but competition for the same customers could be growing. As a result, hotels and STRs are taking lessons from one another. “Operators in both short-term rentals and hotels are thinking about how to serve the same consumer,” observes Skift.

For instance, short-term rental hosts may stop requiring guests to do chores before they leave, especially if hosts charge a high cleaning fee. And professional property managers are providing round-the-clock services, much like a hotel concierge.

Meanwhile, more hotels are entering the extended stay space. According to Lodging Econometrics, roughly one-third of the construction pipeline for hotels in the U.S., or 30% of planned rooms, are extended-stay projects.

And guess what? Hotels do short-term rentals well.

Hotels are entering the short-term rental space

Skift notes that hotels are increasingly pandering to the “globe-trotting bleisure traveler” and offering short-term rentals. Consumer preferences for STRs even for business trips is leading to “the blending and merging of different players in the accommodation industry” — a “muddled middle,” as it were.

Overall, hotel-managed STRs tend to get higher scores for security, service, ease of resolving problems, and cleanliness than non-hotel-operated STRs. They have an upper hand in the three “C’s” of hospitality: cleaning staff, commercial laundry, and a concierge service.

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SOURCE: Skift

While some hotel-operated short-term rentals are located in or adjacent to the hotel that oversees them, hotels are increasingly moving into stand-alone residential properties.

Hotels are going residential

Some hotel companies are interested in developing more 100% branded residential properties, as they can be more profitable for them than traditional hotels.

“There’s a big demand for Marriott stand-alone residences,” according to Dana Jacobsohn, Chief Development Officer of U.S. Luxury Brands and Global Mixed-Use at Marriott International. “They create more loyalty for our hotel brands and we’re making a lot of money with them.” Riyan Itani, Director and Founder of Global Branded Residences, agrees: “My prediction is we will have operators with more stand-alone branded residential than co-located [with a hotel], so they’ll effectively become more residential managers than hotel managers.”

This seems to be particularly true at the luxury level.

Luxury is where it’s at

Hotels with ultra luxury offerings have seen gross operating profit margins more than double recently, from 15% in 2019 to 32% in 2022. No wonder luxury offerings are topping the future pipeline as a percentage of supply: 5.3% of future pipeline under construction in the U.S. is luxury, 4.6% is upscale, 3.7% is upper midscale, 3% is upper upscale, 2.5% is midscale, and only 0.9% is economy.

Stand-alone branded hotel residences — “Think Ritz-Carlton Residences without the actual Ritz-Carlton hotel” — are taking off, “particularly in the luxury space among wealthy international travelers.” The first stand-alone Ritz-Carlton Residences opened in 2009, in response to customer demand. Today, 17% of Marriott’s 128 global branded residential developments are stand-alone.

Marriott has 100 branded residential properties in the pipeline, and 27% are stand-alone. Other hotel brands, including Four Seasons and Hilton, are developing residential programs as well.

As hotels enter the STR space, short-term rental hosts are confronting some of the downsides of outsourcing to a professional property manager.

Unexpected downsides of professionalization

Professional managers seem to make hosts more money. According to Skift, they generated 27% more revenue per available night premium than mom-and-pop peers in 2019, and 34% as of April 2023. So, perhaps it stands to reason that hosts have turned to them in droves. That, and the fact that being on call 24/7 can be a drag.

Large property operators (1,000+ units) grew 27% from April 2022 to April 2023, while their smaller counterparts (1–100 properties) grew only 7%. That may sound good, and maybe it is, but as just about any business that’s grown rapidly can tell you, scaling is hard. Some large property managers now find themselves struggling with back-end operations.

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SOURCE: Lodgify

As Skift observes, “property management is a game played on the ground, and scaling it efficiently and effectively remains hard.” It’s particularly hard to grow a property management company on a national level.

Professional property managers that onboarded hundreds or thousands of properties had to hire a lot of people to take care of those properties. Some have had a hard time keeping up with all that needs to be done, and quality control has suffered. Unhappy STR owners are turning to smaller, local property managers or taking over management themselves.

About the author

Avatar of Juergen T Steinmetz

Juergen T Steinmetz

Juergen Thomas Steinmetz has continuously worked in the travel and tourism industry since he was a teenager in Germany (1977).
He founded eTurboNews in 1999 as the first online newsletter for the global travel tourism industry.

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