Hersha Hospitality Trust CEO Jay Shah expects 2023 to be an interesting year but knows it won’t come without its challenges.
In October, Hersha Hospitality Trust (NYSE: HT) exceeded its RevPAR, or revenue per available room, from the same time in 2019 by 8.7%. The third quarter increase marked the first full quarter Hersha has fully recovered post-pandemic. Although rates are rising and there’s a roaring demand for leisure travel, Hersha is still battling inflationary pressures and working to help its lagging markets like Philadelphia recover.
An analysis by The Business Journals of STR Inc. data for the 28-day period ending Dec. 3 shows that Philadelphia’s hotel occupancy last month was 60.6%, down from 66.5% in the same period 2019. Of the largest 25 hotel markets in the nation, the city ranks 15th in occupancy but 21st in occupancy change from the same time in 2019.
In August, Hersha sold two of its Washington, D.C., hotels to affiliates of New York investment management firm Blackstone for $112.7 million as part of the seven “non-core urban select service properties outside of New York” it announced it would sell for a total of $505 million. The Harrisburg-based company has an ownership stake in 30 hotels across eight states and Washington, D.C., including the 294-room Westin and the 118-room Rittenhouse in Philadelphia. Honing Hersha’s portfolio down, Shah said, has given the company the opportunity to shore up its balance sheet for more financial flexibility.
Shah spoke with the Business Journal about the future of the hotel industry, including the gradual return of business travel, the strong leisure demand and a new consumer outlook on traveling. Here’s what he had to say:
This interview has been edited for length and clarity.
How has inflation impacted the hotel industry?
In an inflationary environment, the hospitality sector generally does better than most of the real estate sectors that might be dealing with the pressure of increasing interest rates. Whenever inflation’s high, the interest rates go up because the Fed raises rates, and in our case, we’re able to, at least from the [average daily revenue] standpoint, stay in sync with some of the increasing costs. We still have a lot to stay focused on and fight through in order to make sure that in this environment, that despite the top lines growing, that we’re able to maintain margins, because our room rates are going up, but so are all the costs of our inputs. You can imagine the associated costs of the operating supplies and equipment and energy costs. And in the hospitality sector, we’re also fighting a continued increasing insurance costs in certain markets. But despite that, we remain cautiously positive for the coming year for our sector.
Business travel is slowly returning to pre-pandemic levels. What trends are you seeing there?
One of the things we do see is, because people have some flexibility, we’re finding that there’s a lot more, quote-unquote leisure travel. Meaning if I’m visiting Chicago for meetings on a Wednesday and Thursday, I might extend through the weekend because I have the flexibility to work away from the office on a Friday. And so, that’s the kind of business that doesn’t fall into one segment or the other when we’re thinking about mix. It kind of straddles across, and that’s a behavior that we were seeing before the pandemic that [is] clearly one that is getting a lot more traction now.
Leisure travel in particular has recovered well. Why is that?
There was a great deal of pent-up demand. I think Americans generally had put lots and lots of travel plans on hold personally, right, and I think also after a couple years of what we went through, I think there even an additional newfound interest in travel, just the ability to be able to travel freely wherever your wanderlust takes you. It’s something we’re noticing is starting to fall in the life’s-too-short category, no need to wait. And it’s a guilty pleasure, an indulgence, a small indulgence that people are happy to partake in right now.
Are you seeing any recessionary fears from customers?
Right now we are not seeing it. I mean, we’re continuing to see very, very, very strong demand patterns going into the new year. It’s always important to remember with hotels where the advantage in inflation is that we rent on a daily basis. But the fear during economic headwinds is that it doesn’t take much to cancel a trip, right, and so that’s why I speak cautiously. But we do look at advance demand and advance bookings relative to advance bookings in prior years, and right now, the demand patterns are looking very attractive for the coming year. I think people are going to stay on the move. I think business travel is going to continue to increase, and we’re just seeing a lot more demand in the group travel segments into ‘23. And what we don’t know, and we won’t know until it starts to happen, is when [we will] start seeing more movement in international inbound travelers, both business and leisure.
What’s your overall outlook on 2023?
We look at ‘23 and imagine that various different business sectors seem to be going through their own challenging periods at different times throughout the year. But I think for hotels, we’re coming out of a depression. And so for us, recessionary conditions, it’s not. We have so much demand recovery left in the portfolio that we think that despite these headwinds, that demand recovery is going to be helpful for us to continue to perform through ‘23.