Hospitality Industry Looks Strong for 2023 – Despite Recession Fears

Despite economic headwinds that have stoked fears of a recession in 2023, the hospitality industry continues to defy expectations and post strong numbers. Market performance of hospitality has exceeded other industries such as technology and retail, with the gap widening in the second half of the year.¹ Add the fact that revenue per available room (RevPAR) has exceeded GDP growth during the current economic cycle, and 2023 should be a good year for the hospitality sector.

Historically there has been a strong correlation between GDP growth and RevPAR, but given the current dynamics of the travel industry, even if there is a mild recession in the next six months, the travel industry will still perform strongly. The post-pandemic urge to travel remains strong, which should drive continued growth in 2023. In the US, RevPAR was up 8.1% in 2022 from 2019, and Europe was up 6.1% for the same period.

Business travel is poised for recovery as companies ramp up their travel budgets. Trade shows and conferences are selling out, reflecting the pent-up demand that persists across all industries to get out of the office. Another factor is the growing work-from-home (WFH) segment of the workforce. In some cases, those employees build their travel plans around both business and leisure. Bleisure travel, where business travelers add on a day or budget extra time in their work trip for leisure activities, is a growing trend. The result of these market developments is continued economic recovery for the hospitality sector.

Reasons for optimism in hospitality sector

The EY organization projects that the global economic picture is mixed, depending on the region, but the long-simmering slowdown will likely turn into a global recession. In the US, the economy is visibly cooling because of inflation, rising borrowing costs, deteriorating private sector morale, and rapidly slowing global economic activity. Elevated inflation and a lingering energy crisis will lead to a moderate recession in the Eurozone.

However, several factors contribute to optimism for the hospitality sector:

  • Leisure demand, group business travel poised to remain strong: Consumer surveys show that most people are planning at least one leisure trip over the next six months. As for group business travel, key statistics, such as a convention center booking increase of 13% in 2023 relative to 2022, point to a strong year for group travel.³ According to a survey conducted by American Express, 65% of respondents expect their spend on meetings and events to increase in 2023.⁴
  • Business travel recovery: According to a recent survey by Morgan Stanley of global corporate travel managers, travel budgets are likely to be 98% of 2019 levels, with nearly half the respondents expecting an increase of budgets relative to 2019.⁵
  • China’s re-opening: Before the pandemic, China was the world’s largest outbound travel market, with Chinese travelers taking 154 million trips and spending $255 billion.⁶ With the lifting of COVID-19 travel restrictions, Chinese travelers will begin to travel again in 2023, creating a measurable impact on both the domestic and international hospitality industries.
  • The rise of the digital nomad: An EY survey of companies found that 87% think COVID-19 has had a profound effect on the workplace, with 72% saying that they now have a hybrid remote/office approach and 75% saying that they anticipate no central office in the foreseeable future. As people become untethered to their offices, these digital nomads will become even more mobile and will work from places where they want to travel.
  • Infrastructure Investment and Jobs Act: Spending associated with the Infrastructure Investment and Jobs Act (IIJA) that was passed in the US in 2022 should lead to additional spending on hotels.

Deals market could see a slowdown

One aspect of the hospitality sector that isn’t expected to be so strong in 2023 is the transaction market. With the Fed continuing to raise interest rates in an attempt to drive down inflation, the cost of borrowing money will continue to go up. As a result, transaction activity is likely to be slow in 2023. Deals will still get done, and there will be opportunities to create value and drive growth through M&A activity in the hospitality sector. Transaction due diligence will be even more critical to identifying the right transaction, given the market circumstances. In some cases, 2023 will be a good time to focus on organic growth. But teams still need to monitor what’s happening in the industry and be prepared should the right deal come along.

Boomerang workers?

During the pandemic, the hospitality industry lost much of its workforce as travel restrictions forced hotels to make severe staffing cuts. The industry’s unemployment rate leapt from 5.7% in February 2020 to 39.3% in April 2020, according to the U.S. Bureau of Labor Statistics (BLS).⁷ Many of these workers took jobs in the technology sector, which needed to fill positions to keep up with sudden demand created by the pandemic.

Three years later, the world is adjusting again. While tech companies shed jobs in response to the state of the economy in 2023, the hospitality industry is now ready to hire in response to the expected increase in travel. One of the sectors that had the biggest job growth in December 2022 was travel and leisure. Hotels that have struggled to provide the same level of service and amenities they did prior to the pandemic may be able to fill some of these positions and get closer to full strength.

As the world learned in 2020, economic conditions can change overnight. Travel demand, while robust at this time, is one of the first areas that companies will turn to if they have to cut costs in the face of a worsening economic outlook. The hospitality industry should continue to focus on efficiencies both at the hotel and the corporate levels. Increasing digitization of the customer experience, advanced analytics to better target and serve customers, and automation to drive efficiency should be key priorities. Bottom line: 2023 should be a good year for the travel and hospitality industry.

The views reflected in this article are the views of the authors and do not necessarily reflect the views of Ernst & Young LLP or other members of the global EY organization.

Article references

  1. World bank database, US FRED, Cushman & Wakefield
  2. “Hotels Embrace Blue-Collar Workers to Prop Up Sagging Business Travel,” The Wall Street Journal, Jan. 23, 2023
  3. Convention Center Bookings Boost Optimism for Hotel Group Business in 2023, Dec. 13, 2022
  4. AMEX Meeting & Events Global Forecast: More In-Person Connections in 2023, Nov. 22, 2022
  5. 2023 Outlook: Business Travel Bounces Back, Morgan Stanley, Dec. 21, 2022
  6. Where are Chinese travelers heading now that borders have reopened?, CNN, Jan. 9, 2023
  7. U.S. Bureau of Labor Statistics

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