March 30, 2022

Hoteliers Say Higher Gas Prices Haven't Curbed Hotel Demand in US

Hotels in Oil and Gas Markets Could Benefit

Americans are paying more to put gas in their cars, but the impact on the hotel industry and the summer leisure season is likely to be minimal. Pressure to increase domestic oil and gas production, however, could lead to greater hotel demand from workers in that industry in certain markets.

According to the Wall Street Journal, average prices for regular gas reached $4.32 per gallon on March 14, having increased for 11 straight weeks. the New York Times reported the average price of gas has fallen to about $4.24 per gallon toward the end of March, which is "still 18% higher than it was last month and 48% more than it was a year ago."

At the same time, U.S. hotel demand continues to recover, as more rooms are being booked weekly and at higher rates.

According to the latest weekly performance data from STR, CoStar's hospitality analytics firm, U.S. hotel industry occupancy for the week of March 13 to 19 was nearly 67%, the highest its been since the summer of 2021. Hotel rates for the week also have increased sharply, up more than 4% from the previous week and 14% higher than they were at this time in 2019.

Improving U.S. hotel performance shows that the industry is on track toward a recovery to pre-pandemic, or "normal," levels — and so far is not being derailed due to rising fuel prices.

According to STR VP of Analytics Isaac Collazo, that's not surprising. Historically, rising gas prices have shown minimal impact on U.S. hotel demand, he writes for STR's data insights blog.

Tracking gas prices alongside U.S. hotel room demand back to 1990, "very little of the demand change can be explained by changes in gas prices," he writes.

"The effects on American wallets are real, but based on historical comparisons, the impact from rising gas prices has not been large enough to deter travelers from making trips that require hotel accommodations. It is more likely that travelers have made different purchasing choices through the level of lodging they select or in other travel expenses, such as meals and entertainment. Simply point, it is not a question of 'if' Americans are traveling but 'how' they travel during periods with higher gas prices," Collazo writes.

"Additionally, travel is generally skewed toward higher-income individuals and families, who are more able to absorb higher costs. With that in mind, it is also important to note that pent-up demand from the pandemic could also offset the negative impact from those who choose to forgo travel because of costs. Airlines will likely increase fares as fuel costs increase. As business travel recovers, those higher airfares will probably be attributed to 'the cost of doing business' and will not impact corporate transient and group demand. Just like with higher prices at the pump, higher airfares will likely not impact travel behavior much."

Still Taking Trips

A year ago, U.S. hoteliers were optimistic that consumers could become more comfortable traveling as COVID-19 vaccines became more widely available. Even if travelers didn't feel comfortable moving through airports and boarding crowded planes, at least they could take shorter trips via car, and thus "drive-to leisure" became a dominant phrase of 2021 among hoteliers.

Columbus, Indiana-based Everwood Hospitality Partners has hotels in Indiana, North Carolina, Louisiana, Texas and Florida. Tracy Kundey, Everwood's managing director of hospitality, said one of the company's highway hotels has lost a little bit of business that could correlate with higher gas prices.

"As of today, we have not seen an impact other than one of our properties which typically relied on 30 to 40 walk-ins per day from interstate traffic off I-65," he said via email. "The walk-in business has curtailed dramatically, however, to other assets that have not been heavy walk-in/last day [and] have not seen the decline."

For now, travelers are still taking the trips they planned over the winter months, regardless of a surge in gas prices, Kundey said.

"As for impact, I think we are still seeing the pent-up demand from 2020, and the paradigm shift seems to be pushing people forward regardless of inflation, gas or the fact that all this is costing the average household $300 more per month," he said.

But if gas prices keep climbing, that could be a headwind to hotel demand later in the year.

"Now if gas hits $5 per gallon, I think we will see a delayed impact as a lot of people have booked and committed to travel; look to [the fourth quarter] to see the impact to travel from rising cost," he said.

Spiro Frangos, senior vice president of asset management at DiamondRock Hospitality, said he doesn't expect rising gas prices to have much of an effect in the company's markets. The Bethesda, Maryland-based public real estate investment trust owns upscale and boutique hotels and higher-priced resorts in markets such as Sedona, Arizona; Sonoma, California; San Diego; Vail, Colorado; Key West, Florida; New York City; Chicago and Boston, among others.

"If we're talking resort-only, drive-in markets, I don't think it's going to have any impact whatsoever," he said. "For us, we're also talking about extremely high barriers to entry in these markets. You're talking about Key West; you're talking about Sedona, Sonoma. For markets like that, they're not going to get affected very much at all. They're just not. Typically, if you could afford to live or even stay in Key West in the past, you could now."

Even in DiamondRock's urban markets, the price of gas likely won't cause any significant drops in demand, but it might be more noticeable, Frangos said.

"If you're talking our overall portfolio, New York City, Boston, urban markets, Chicago included, then I think that there's definitely going to be a small impact there," he said. "But there's so much supply that it's not going to be that much of a difference."

DiamondRock's revenue-management teams are staying "aggressive" with rate pricing, Frangos said. Booking windows have even "almost doubled," he added.

"We just really believe that it's going to come in. ... We're taking the position that it's better to hold on to rate, as long as you can," he said.

Oil and Gas Markets

Hotels in U.S. oil and gas markets potentially could benefit from pressure to ramp up domestic oil production as a result of the ban on Russian imports, as demand for rooms grows among workers in that industry.

Spirit Hospitality manages nine hotels in northern Colorado, including two in Greeley, where 90% of the state's oil is pumped. Vice President of Operations, Sales and Marketing Aryell Mattern said the company's two Greeley hotels have had a pickup in bookings from its large oil and gas company clients for the second quarter, but that business might be more robust if not for federal regulations that are limiting oil production in the market.

"During the first quarter, it was really down historically from what we've seen in the past; we didn't have a strong oil and gas pickup, but we have had ... business from some of those bigger [oil and gas] companies coming in now," she said.

"It's interesting, because there's moratoriums and different regulations that they just passed in 2021. So even though we need to drill more, they have to get through all of those rules and regulations of the counties and city. ... When the [price per] barrel goes up, obviously you think that oil and gas is really strong, but it's a globally traded commodity. So, of course, what's happening in Russia will affect our Greeley market and our hotels that are dependent on that oil and gas. I feel like [the oil companies] are trying to collect themselves a little bit. … trying to figure out what to do next as far as making sure they're making the right decisions before they start to do more domestic drilling."

She said the company's hotels have also benefited from the rise of "Great American Road Trips" during the pandemic, but that leisure travel demand has never really driven performance.

"Colorado as a whole is in really high demand for leisure travel; that just kind of trickles in to fill up the extra rooms," she said, adding the company hasn't noticed a drop-off in that demand as a result of higher gas prices.

"If you look at the cost of flights, if you do a little bit of a comparison, ultimately it still is cheaper for people to drive within reason. I'm hoping that we won't see any dip. Spring break is going on right now, and our hotels have been pretty busy with spring break activity," she said.

More Drive-To Travel

It's possible that 2022 could be another big year for drive-to markets, especially if rising gas prices significantly raise the cost of flights, Frangos said.

Kundey said it's likely that this year, people aren't willing to postpone their travel plans again after possibly having already done it.

"A lot of forces are against us, however, the pandemic scars have people in a mindset of not pushing [travel] out, maybe partly because of being pent-up, but maybe also the fear that it will be taken away again," he said.

As drive-to travel really spiked in 2021, and even in the summer and fall of 2020 before vaccinations were widely available, the demand for RVs skyrocketed. But that trend might already be over, especially if higher gas prices are here to stay, Frangos said.

"We don't play in that space, but we see it around our hotels. We have an RV park literally across the lake and across the creek from our Sedona property," he said. "We're hearing their occupancy is getting massively affected. Similarly at [Kimpton] Shorebreak, our Huntington Beach property, literally right down the road there's RV parks there as well, and they are getting massively affected by occupancy due to the cost of the gas."

Now more RVs are up for sale, which is a complete reversal from a few years ago, Frangos added.

This year, U.S. hotels could see a significant return of international travel demand, even if it's from Canada and Mexico, he said.

But Kundey pointed to Russia's invasion of Ukraine as a possible wrinkle in international travel demand fully recovering this year.

"Without being political, a lot of our markets are dependent on international travel; the Ukraine invasion may be more of an impact for us today," he said.

Copyright 2022 CoStar Group. All rights reserved. From By Dan Kubacki and Robert McCune, Hotel News Now.

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