Business Travel’s Recent Rebound Is About To Get Hit By Corporate Cutbacks, Threatening Hotels Once More
Business travel is coming off its best three months of the pandemic after Labor Day, as more workers have been gathering together and conferences have been back in full force.
But that nascent recovery could be short-lived as economic uncertainty and spending cuts take a bite out of corporate travel budgets.
“It’s a discretionary item for companies, and it’s one of the first things that does and can get cut, and as companies are setting budgets today, in a different environment than they were 12 months ago, that will probably impact the near-term outlook for business travel,” said Michael Bellisario, senior research analyst at Baird.
Business travel bookings increased sixfold for fall 2022 compared to the previous year, according to travel expense management company TripActions. But some companies have already started to go into cost-saving mode, which typically means cutting down on trips.
In the past couple of months, major tech companies like Amazon, Twitter and Meta have begun laying off thousands of workers, freezing hiring and reducing costs in the millions. Large public brokerage firms like CBRE and JLL have also begun cutting their workforce in the hope of reducing costs.
Some corporate managers have started to ban nonessential business travel, Henry Harteveldt, a travel industry analyst for Atmosphere Research, told the New York Times, adding that there has been an increase in the number of company executives it takes to approve employee trips.
The Global Business Travel Association has pushed back its estimate for a full recovery of business travel to pre-pandemic levels by 18 months, from 2024 to 2026.
“[Budget cuts] will probably impact the near-term outlook for business travel, and on top of it, if there are additional job cuts or layoffs, that will further impact it as well,” Bellisario said.
The near-term outlook darkened just as the hotel industry overall, bolstered by strong leisure demand, saw some of its strongest numbers ever in the summer and fall.
Overall travel spending hit its highest level since March 2020 in September, according to the U.S. Travel Association, and while it slowed a bit in October, it still was 3% above 2019 levels.
While average occupancy is still slightly below pre-pandemic levels, average revenue per available room for U.S. hotels was 14% higher in October than in the same month of 2019, according to STR data.
Bethesda-based hotel REIT Pebblebrook Hotel Trust's average daily room rate in the third quarter was 19.9% higher than it was in 2019, with RevPAR also exceeding pre-pandemic levels. Occupancy in the portfolio stood at 72%, an 18% increase compared to the same quarter last year.
Pebblebrook executives said on their quarterly earnings they saw a strong recovery of business travel, especially after Labor Day, with bookings improved and no signs of a slowdown. But Pebblebrook CEO Jon Bortz told Bisnow he is worried that the strong business travel demand might not last.
“I think it’s fair to assume we are a cyclical industry and we are impacted by the economic cycle. There’s no escaping it,” Bortz said. “It will slow the pace of the recovery from the pandemic.”
Bortz said interest rates have a large impact on business spending, and they have been rising rapidly. The Federal Reserve increased interest rates by 75 basis points in November, marking the fourth consecutive hike of that size this year, and rates are expected to keep rising into next year.
“Given the Fed's actions, we continue to closely monitor bookings, cancellations, activity levels, corporate travel policies and overall spending for any signs of slowdown,” Bortz said on the earnings call.
There are two main sectors of business travel: transient, like a salesperson meeting with clients, and group, such as conferences or large company meetings.
As business travel has started to return, group bookings have outpaced transient trips because workers are largely staying home rather than traveling for small meetings, whereas group bookings tend to be more popular due to the pent-up demand from the pandemic, Greater Boston Convention and Visitors Bureau CEO Martha Sheridan said.
“We are seeing corporations interested in gathering in large and small groups, and I’d attribute that to the fact that so many of their employees are working remotely and want the opportunity for their teams to be together,” Sheridan said.
Although group bookings have been recovering at a higher rate for some markets, they might be the first to get cut as more companies look to reduce costs.
“We tend to see the immediate cutbacks coming in group bookings, and the reason is that if you’re trying to reduce costs as a corporate entity, the biggest place to lower your cost is in group booking,” Bortz said. “It’s where you can have an immediate impact.”
Transient travel can include meeting with clients or customers, which may be a more essential part of businesses if the economy worsens, Bortz said.
Andy Ingraham, founder and president of the National Association of Black Hotel Owners, Operators & Developers, said that a potential drop in group bookings could have a serious impact on the industry.
“At the end of the day, if your constituency cannot afford to travel, then there’s no sense to have a conference,” Ingraham said. “When that happens, us in the hotel business will suffer because our big-box hotels and convention center cities depend on that market.”