IHM’s topsy-turvy Z-A: What to expect in hospitality and real estate in 2023
Worldwide: After a topsy-turvy 2022, here are the major hospitality and real estate trends we expect to see in the year ahead, some more unexpected than others. IHM’s editorial team [George Sell – editor-in-chief at IHM, Paul Stevens – editor of ShortTermRentalz, and Eloise Hanson – editor of Boutique Hotel News] – reports.
Z is for zero carbon
Probably the biggest issue facing the real estate sector – and by extension travel and tourism – is reaching net zero carbon, both in construction and operationally. Governments have set targets, and consumer behaviour is changing, albeit slowly and hampered by the cost of living crisis. But it is the investment community that is setting the pace, particularly institutional investors with long-term horizons. In real estate, some notable examples include Hines, which has set a target of 2040 for its entire estate to be operationally net zero carbon, without carbon offsets, and L&G, which has set a target of 2030. The standout in this regard is Denmark-based investor NREP, which has introduced an internal carbon tax to incentivise rapid and deep emission cuts. The company, which has €18 billion of assets under management, has committed to reducing embodied and operational CO2 emissions by 30 per cent and 50 per cent respectively before the end of 2023. The new internal CO2 tax will help drive innovation by putting a monetary figure on the cost of carbon to the business. The tax is introduced alongside a green incentive to motivate project teams to implement sustainability efforts exceeding market standards and secure above average sustainability certifications. NREP is committed to becoming entirely carbon neutral by 2028 – encompassing both operational and embodied carbon – and the new internal carbon tax will be a key driver in this ambition. Other firms will need to follow their lead. GS.
Y is for yurts
Transient stays fuelled by an appetite for one-off experiences are bridging the short-term rental and hotel sector closer together. The growing interest in experiential lodging such as treehouses, shepherds huts, teepees and more has therefore prompted the addition of yurts to our list. Campspace, a booking platform for sustainable, outdoor stays [including yurts], claims to have grown at a rate of 300 per cent per year. Often providing self-catering equipment, yurts would allow for leaner staffing, and the continuous staycation trend presents an opportunity for bricks-and-mortar accommodation providers to partner with, or introduce alternative room categories. A report by Future Market Insight reveals that the pop-up hotel sector – which includes yurts, tents, igloos and shipping containers – is expected to reach US $34.24 billion by 2032, a projected increase of more than $15 billion over the last decade. EH.
X is for (e)xchange rates
Political and economic instability often results in significant shifts in currency exchange rates. A good example of this was the ill-fated ‘mini budget’ announced by then-UK chancellor Kwasi Kwarteng, which saw not only billions wiped off UK share prices, but a sharp drop in the value of the pound compared with the dollar and the euro. One of the immediate effects of this was to make buying goods or services in Britain – whether that be real estate or a holiday – quite a bit cheaper for some nationalities. This wasn’t lost on canny investors who have been acquiring property, including hotels, in the UK while the pound was low. In the opposite direction, a weak pound has meant that overseas travel is more expensive for UK residents, meaning that we are likely to see the staycation boom extend for a third consecutive summer, as Brits continue the trend for holidaying at home. On a global level, countries that rely on a large proportion of tourists coming from one specific country are susceptible to changes in the exchange rate between these two countries. Examples include Mexico, where around 80 per cent of international arrivals come from countries using the US dollar, therefore the strength of the US dollar against the Mexican peso has a significant impact. 2023 is likely to see further political and economic uncertainty which will see winners and losers on the exchange rate see-saw. GS.
W is for Way
Launched in the early months of the pandemic, Way is a technology platform which helps businesses to curate and offer experiences, local events and brand activations. The consumer shift away from material items towards immersive experiences has contributed to Way’s success so far, which includes partnerships with Kimpton, Highgate, Graduate Hotels, Fairmont, and more. Partnerships of this kind also serve as an additional revenue stream and can help to drive brand loyalty. Having recently raised $20 million in Series A funding at a valuation of $100 million, Way is set to expand worldwide. EH.
V is for venture capital
While venture capital fundraising hit a record high in 2021, global venture capital funding for proptech companies dropped 38 per cent from $32 billion to $19.8 billion in 2022. The contrast between the two years could not be more stark and it has led to suggestions that the venture capital bubble has burst. Factors such as 40-year high inflation levels and surging interest and mortgage rates can all be attributed to the global funding decline, and in 2023, young startups will have to retune their ambitions. Investors will be increasingly cautious when it comes to valuations of private firms due to the ongoing macroeconomic headwinds and late-stage and mega funding rounds may slow down further in the year ahead. PS.
U is for understaffed
Staffing issues will continue to be a focal point of conversation for hospitality providers. UKHospitality argues that the industry needs to produce 120 per cent of pre-pandemic business in order to survive, but the labour shortage is costing 22 billion in lost revenue. The recent winter months have seen many businesses temporarily or permanently close – a fateful combination of rising costs, the unavailability of workers, and low consumer spending. As we edge into spring and eventually the high season, greater effort to attract and retain staff will be paramount if businesses are to be protected. EH.
T is for timeshare
As KOALA CEO Mike Kennedy discussed on a STRz webinar, the reputation of timeshare “unfortunately supersedes some of the amazing aspects of the product”. The timeshare industry has been dogged by talk of scandals and “nefarious” entities over the years, but the product has evolved as iconic brands such as Marriott, Disney and Hilton have built up their own vacation clubs, providing suites that are hybrids of vacation homes and hotels. Kennedy was also keen to add how he wanted to “shine a light on the positive aspects of the industry” and ironically, the macroeconomic headwinds could play in its favour. More and more timeshare companies are offering flexible membership programmes that allow members to buy interest in a club and exchange points for stays at a range of condos or hotels, rather than enter into a fixed contract for a specific property. That flexibility, plus the ability to offer a more stably priced product than other lodging models, could lead to a timeshare revival among younger, more nomadic demographics. PS.
S is for space tourism
It seems strange to have space tourism in this alphabet just a few letters away from Zero Carbon – ample evidence that not everybody in the travel sector is pulling in the same direction. But it can’t be denied that there is demand for excursions beyond earth’s atmosphere – and this isn’t some distant future pipe dream, the reality is here. Virgin Galactic says it is on track to begin space tourism flights from the second quarter of 2023, with fixes to its mothership complete and a change to its management team implemented. The VMS Eve mothership is undergoing ground tests this month and will then begin flight tests to check the “enhancements” made after the New Mexico-based company was forced to delay its first commercial flights in September 2021 because of a possible malfunctioning component in its VSS Unity rocket. Other major players include Elon Musk’s SpaceX, Boeing, Airbus, as well as less familiar names such as Axion Space, Blue Origin and Orion Span. The average cost of a day trip to space is around £370,000, and the value of the entire market is expected to grow by around US$7 billion between 2023 and 2027. Personally, there are enough places on Planet Earth to keep me occupied for the rest of my life but that is clearly not the case for everyone. GS.
R is for recession
Rising interest rates and a general surge in the cost of living across the world have inevitably prompted talk of a global recession in 2023. Whether you are a bull or a bear in this respect, it’s worth a quick look at the potential implications of a recession on hospitality and real estate. The good news is that demand for travel is undaunted, in fact the lack of ability to travel during the pandemic has heightened the appetite for it to resume for many. “More than half of Americans report that travel is now a priority and see their holiday as a sacred, worthwhile investment,” says James Thornton, CEO of Intrepid Travel. “Having a period without travel has made people appreciate their holidays even more.” I have detected a similar sentiment here in the UK where demand for hotel and short-term rental stays show little sign of abating at this stage. It is at the luxury and the economy ends of the market where the signs are brightest, with the squeezed middle demographic avoiding the squeezed middle tier of hotels. In the living sector, rising interest rates equate to higher mortgage costs, which mean bigger potential markets for BTR and coliving. GS.
Q is for Qatar
Qatar became the first Middle Eastern nation and smallest by population to stage the prestigious FIFA World Cup in 2022 but the true legacy of the tournament will be defined in the months and years ahead. The scale of the hospitality infrastructure developed for the tournament is pretty staggering – new properties included those under brands such as St. Regis, Rixos, The Outpost, Waldorf Astoria, The Ned, Chedi, Raffles, Rosewood, LXR and DoubleTree by Hilton brands, among others. Fans even had alternative options, such as glamping in the desert, catching a ferry from neighbouring gulf states, and staying in ‘floating hotel’ cruise ships. This intense year of development represents a major milestone in Qatar’s goal to welcome six million visitors a year by 2030. The state reportedly spent $200 billion (£177 billion) on infrastructure and stadiums since it won the bid to host the tournament in 2010. The likes of David Beckham were brought in to spearhead a comprehensive advertising campaign which draw around a million visitors during the World Cup and hopes to keep them coming back. 2023 will be the acid test to see if this will be the case, and whether Qatar has enough pulling power to divert guests who would otherwise go to Dubai or Abu Dhabi. Even if tourist numbers go through the roof it’s going to take a long time to recoup the state’s massive investment, but it will be fascinating to monitor this year to see if the ambitious plan is starting to work. PS and GS.
P is for PBSA
Of all the asset classes which are seeing a serious imbalance in the supply / demand equation, purpose-built student accommodation (PBSA) is certainly one of the most acute. The sector, and here we are talking globally, looks set to capitalise on a huge and growing demand for product, exacerbated by traditional student landlords transferring stock to the vacation rental market.
In the UK, we have seen headlines about students in Manchester and Liverpool being forced to take accommodation in Wales as there is none available in their university cities. In Germany, more than 35,000 undergraduates were still waiting for a place in student housing at the start of the academic year. The Irish Student Union organised a walk out to protest government inaction over the lack of accommodation. And in the US, some 9,400 students at the University of California alone were denied university housing this autumn because of shortages. So it’s no surprise to see the institutional powerhouses getting heavily involved in PBSA globally. Recently we’ve seen Ivanhoe Cambridge, the property arm of Canada’s second-biggest pension fund, announce plans to invest $1 billion AUD into Australia’s largest student accommodation fund, which is managed by Scape. It cited “favourable demographics in the region and the demand for quality education in Australia”. And it’s not just institutional money which is seizing the opportunity. In the US, Vesper Holdings has acquired Sol y Luna Apartments, a two-tower, 340-unit PBSA asset in Tucson, for $203 million. The deal for the 972-bed property, which is near the University of Arizona, is one of the largest student housing purchases ever in the US history and is the largest PBSA transaction made without institutional capital.
As the accommodation shortage continues to bite around the world, I expect to see numerous major deals in the student sector in 2023. GS.
O is for OYO
Our prediction for OYO could almost be a cut and paste job from a year ago. After countless false dawns, the startup is resurrecting its initial public offering (IPO) plans for the first half of 2023. Most recently valued at $9 billion, OYO submitted fresh financial documents in September, 12 months after originally filing to go public, and reports suggest that the hospitality chain could debut on the stock market by April. A word of caution though – five tech startups in India have shed more than $18 billion in value since listing in the last 16 months. Furthermore, OYO is shutting down projects and merging teams in preparation for the offering, as well as laying off 600 employees and hiring elsewhere to grow the number of rentals on its platform. PS.
N is for nu-wellness
Awareness of physical and mental wellbeing has increased over the last few years. As a result, interest in wellness retreats and other health related experiences has grown considerably. Expedia noted in its 2023 trends report that US travellers want something new and exciting when it comes to wellness activities, such as forest bathing and foraging. Booking.com also reports that 36 per cent of travellers want to go on an erotic escape, and the same percentage (36 per cent) are interested in trying psychedelic experiences. In August 2022, data from Google Trends shows that searches for ayahuasca retreat nearly reached peak popularity (91 per cent) which compares to searches for spiritual retreat (eight per cent) during the same period. EH.
M is for Matthijs Welle – Mews
It’s a double-whammy for ‘M’ as we shine a light on Matthijs Welle, the CEO at Mews. The cloud-based property management software company has recently completed a whopping $185 million Series C funding round, which Welle said would be used to accelerate product, engineering and global expansion. Considered to be amongst the top innovative hotel tech providers, Mews not only champions its own products but actively relies on industry partners (third-party software and schools) to encourage wider application of technology and a deeper understanding of how it can support operations. Under Welle’s leadership, Mews has acquired four companies since 2019, partnered with five hotel schools, launched two products, and increased its client base to over 3,000 hotels. EH.
L is for LatAm
If the Middle East was the fastest-growing market for short- to mid-term rentals in 2022, Latin America is set to be the hottest destination for 2023. What was previously seen as a market with untapped potential is now piquing investor interest – Naya Homes (Mexico) and Sundes Collection (Chile) are emerging from stealth to secure investment, Casai (Mexico) and Nomah (Brazil) have merged to create a rental powerhouse, and Despegar and Blueground have made high-profile acquisitions across the continent. As Hostaway CEO Marcus Rader explains: “We’re seeing above-average supply, rates, and occupancy in LatAm nations right now, which may be why brands like Despegar and Blueground have made recent expansions into these markets.” PS.
K is for keep it local
The squeezing of supply chains – initiated by Brexit, amplified by the pandemic and exacerbated by the war in Ukraine – has forced the hand of many accommodation providers to rethink procurement strategies. Shipping times are unpredictable, ordered items aren’t guaranteed, and as a result the increased cost of sourcing locally hedges against disruption. Companies are also striving to meet the demand for local experiences. Airbnb for example has launched Withlocals, a certified B Corp platform which connects travellers with tour guides and activity hosts from different cultures. Tour operator Audley Travel has also reported that hotels immersed in nature and a strong community will have a higher traveller appeal. Cultural events, F&B, coworking spaces and more can help to showcase the local area and drive footfall. EH.
J is for Jumeirah Group
In December 2022, Katerina Giannouka stepped into the role of CEO at Jumeirah Group. It marked a key milestone for the UAE-born luxury hotel group, with Giannouka becoming the first female leader in Jumeirah’s trading history. The group was established in 1997 and later became part of Dubai Holding in 2004. In her role, Giannouka will oversee 25 open hotels, the majority of which are located in the Middle East – a region where women face a number of restrictions. But this cultural trait is not geographically specific; the wider hospitality industry has historically been male-dominated. Research shows that women hold one leadership position for every 10.3 men within the hotel sector, an increase from one to 11.2 in 2019. Herein lies the significance of Giannouka’s appointment. EH.
I is for inflation
Soaring inflation was a big concern for hospitality businesses in 2022, and while The National Institute of Economic and Social Research predicts “a rapid fall” in inflation in 2023, that is still dependent on multiple factors. When the UK recorded a 41-year high rate of 11.1 per cent in October, the spiralling inflation could be traced back to an upsurge in energy prices triggered by the war in Ukraine, rising interest rates and global supply chain bottlenecks – all of which have contributed to the current cost of living crisis. With anxiety over labour shortages and a drop off in consumer confidence amid a recession, hospitality businesses may need to go back to basics to reduce costs, while still providing the best guest experience and a high-quality product. In its annual assessment of the hospitality sector, UHY Hacker Young pointed to increased tech adoption as a driver for being more profitable – removing complexity and automating functions in the backend, as well as optimising processes for staff efficiency, allowing businesses to spend more time on guests. PS.
H is for heritage travel
From castles to manors and country estates, travellers are being inspired to experience the places, artefacts and activities that authentically represent the stories and people of the past and present, including their ancestors. Such venues that are converted for accommodation purposes are versatile for numerous reasons – whether it is holding weddings, allowing families to rekindle their favourite outdoor pursuits and events, or catering to romantic getaways in the countryside. National Trust Holidays may have been renting out some of its properties in the UK since the 1940s, but businesses such as Storied Collection (which launched in October) and Airbnb (which introduced a specific category for historical homes) are set to spearhead a new wave of popularity in cultural and historic hotspots in 2023, fuelled further by prominent streamed series e.g. Bridgerton and Downton Abbey. PS.
G is for government
Since the start of the pandemic, governments have been forced to an unprecedented level of intervention in society – through lockdowns and vaccination programmes – and in the economy – in the form of furlough payments, company loans and latterly support with energy bills. It is the latter which is a concerning and contentious issue. In the UK, this support has kept many businesses in the hospitality sector afloat but the level of support is due to be cut significantly in April. James Cartlidge, the exchequer secretary to the Treasury, said the government would provide £5.5 billion of “transitional support” for businesses over 12 months from 1 April 2023. He said the government’s funding of the Covid vaccine rollout, furlough and support for Ukraine had been “right but all have come at a cost”, adding: “It is not for the government to habitually pay the bills of businesses.” This has dismayed industry leaders across numerous sectors, not least hospitality. UKHospitality Chief Executive Kate Nicholls says: “The absence of a sector-specific package that helps vulnerable sectors like hospitality will still result in higher bills. Our analysis shows the new, lower level of support will see a total £4.5 billion hike in bills for the sector compared to the previous scheme. This will simply be unsustainable for many.” Sadly, I think there will be many hospitality businesses which will not make it through the year. GS.
F is for flexible living
Flexibility has become such an important concept in the hospitality and real estate space that it dominates the way many asset classes are evolving. In the case of PBSA and BTR projects, it translates to the way the buildings are filled during the initial lease up period, when operators will adopt a flexible living approach and rent the units on a shorter stay basis to a customer base which is different from its core target audience. BTR operators are also becoming more flexible about the length of contracts they offer – most residents want multi-year tenancies for the certainty they provide, but others want as little as three months on a rolling basis as their circumstances can be changeable. It is probably the workspace market where flexibility is having the most disruptive effect. Traditional office leases have been for five, 10 or even 15 years but with post-pandemic working habits changing drastically, companies are embracing the flexible workspace ethos which offers much more choice in length of lease, as well as building layout and amenities. GS.
E is for European Commission
2023 promises to be a pivotal year in the standardisation of short-term rental legislation in Europe. Following a public consultation, the 27 member states of the European Parliament will discuss and vote on an OTA data-sharing proposal put forward by the European Commission which is designed to “enhance transparency” and “help public authorities ensure the balanced development” of a sustainable tourism and short-term rental sector. Under the proposed rules, Airbnb, Booking.com, Expedia Group and TripAdvisor will have to share data about host identities and their activities with the Commission, and it has the potential to set a precedent for regulatory stances around the world. PS.
D is for digital twins
Whether the hype around the metaverse is to be believed or not, digital twin technology has far-reaching implications for the built environment. Considering the sweeping commitments to sustainably develop and operate buildings, virtual replicas of an asset/entire portfolios can help to assess and analyse how best to design and manage real estate. It can apply to future new-build projects as well as conversions, helping to mitigate commercial risk and increase ROI. What’s more, consumers can also interact with digital twins – be that offices, residential, serviced apartments and more. It’s effectively a marketing tool for potential tenants or guests to explore different settings before signing a lease or booking an overnight stay. And when 43 per cent of global travellers report they will turn to virtual reality to inspire their vacation choice in 2023, expect digital twin technology to scale this year. EH.
C is for conversions
One of the key strands of the built environment’s mission to reach net zero carbon is how to address the thorny issue of embedded carbon. Consequently, we have recently seen a fairly drastic shift in attitudes among planners in certain cities, particularly in London, about the relative merits of conversions versus new-build. And it is typically a strong presumption towards the former. Adaptive reuse is becoming the way forward in the majority of cases, as the embedded carbon in a sizeable urban development is often far more than the lifetime savings of a more efficient new building. This approach will often result in a more diverse streetscape and the retention of older buildings which might otherwise be demolished. Shifts in the economic landscape such as increased labour and materials prices and the rising cost of development finance have also meant that conversions are becoming more attractive than new-builds in many cases, as edyn’s Andrew Fowler pointed out on our recent webinar addressing the topic. GS.
B is for biometric payments
The digitisation of payments is continuing to accelerate across all aspects of our lives – contactless payment platforms are largely ubiquitous, QR code payments are still a popular choice for many consumers, and a report by Payments Industry Intelligence suggests that almost five billion people will be using digital wallets such as Apple and Google Pay by 2025. The next big innovation appears to be point-of-sale (POS) technology that uses biometric authentication based on physical characteristics to authorise payments, ranging from fingerprint and iris recognition to heartbeat analysis, DNA matching and vein mapping. The potential for biometric authenticators to revolutionise the guest experience and the way in which the hospitality sector manages payments is endless, from ensuring smoother checkouts to secure payments with enhanced security, as well as limiting the impact of inconveniences such as lost bank cards or damaged phones. PS.
A is for artificial intelligence
Whilst AI has been around for many years, its machine learning capabilities and evolutionary cycle suggests that use cases for AI will proliferate. Hospitality providers may already use AI tools to recommend add-on products or services when a customer makes an online reservation. AI-enabled chatbots are also gaining in popularity, which are programmed to answer FAQs and field general enquiries. The slated $29 billion valuation of viral tool ChatGPT provides a strong flavour of appetite. But the potential for AI to transform hospitality and real estate lies in its operational power. AI can be leveraged to inform transactional and commercial decisions, build rich customer and tenant profiles for personalised stays, and ultimately improve KPIs (especially around ESG) to drive asset value. EH.