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Economic Pressure and U.S. Budget Hotel Performance

In the early months of the year, the U.S. budget hotel sector has experienced a decline in performance compared to the previous year, raising questions about the impact of inflation on American travelers’ decisions.

During the first quarter, economy-class hotels in the U.S. reported a 6% decrease in revenue per available room (RevPAR) compared to the same period last year, as per data from CoStar and STR. This data set includes preliminary rate information from numerous rooms across the country. Notably, economy brands such as Econo Lodge, Days Inn, Super 8, and SureStay are not faring as well as their more upscale counterparts.

It’s important to distinguish that while performance has softened, it doesn’t imply that budget hotels are vacant. When compared to pre-pandemic times, the RevPAR in the early months of 2019 was only slightly better. Additionally, demand varies by market, with some Sunbelt cities experiencing a surge in demand, particularly from travelers involved in infrastructure projects.

Despite this, economy-class establishments have seen the weakest performance among all hotel segments. A recent report from Truist Securities highlighted concerns for Wyndham and Choice Hotels, with domestic RevPAR down approximately 4.5% and 3.5% year-over-year, respectively, in the first quarter.

The analysts, however, still favor the stocks of these companies for various reasons. They anticipate further clarity on trends once the companies release their performance results in the coming weeks.

Inflation’s Impact on Travel

Traveler sentiment surveys present mixed results. While some demographic groups in the U.S. face cost pressures that could influence their travel choices, more affluent Americans continue to spend liberally on vacations.

A January survey conducted by The Harris Poll for NerdWallet revealed that only 45% of Americans planned to take a trip requiring a hotel or flight this summer, with 91% of respondents adjusting their travel plans to economize.

Similarly, a survey by Morning Consult for the American Hotel & Lodging Association indicated that over half of the 2,200 travelers surveyed are less inclined to plan an overnight trip due to inflation.

The inflation challenge primarily stems from non-travel expenses encroaching on travel budgets. However, for those with stable incomes, there is a silver lining: airfares have dropped by 7%, and rental car rates have decreased by 9%.

While one might expect budget constraints to lead to a preference for cheaper accommodations, the trend shows that travelers with less disposable income are either reducing their spending or opting for off-peak travel, resulting in less frequent stays at budget hotels.

Conversely, those with maintained spending power are increasingly choosing higher-end accommodations, a trend noted by Deloitte in a survey last year.

Despite the challenges at the lower end of the market, the overall demand for U.S. hotels remains robust, with affluent Americans still planning significant trips. A February survey by MMGY Travel Intelligence found that 76% of respondents who were financially capable of taking a trip last year intend to do so again this year, an increase from 70% the previous year.

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