As 2023 ends, we look back on a year where hotel performance held steady, with occupancy closing out the year near 63% (vs. 66% in 2019) and ADR rising just under 5% to roughly $155 USD. Group room nights continued to show substantial growth, helping fill the gap left by some pullback in the domestic leisure segment. While hotel operations were going strong, a different story played out in the transactions market, as the sector experienced a low not seen since 2020. The federal funds rate started 2022 at less than 1% and, by late summer of 2023, topped out at 5.25% to 5.5%; moreover, bank failures early in the year sent shockwaves through the investment community. These factors not only cooled the transactions market but sent an Arctic blast through it. As a result, transaction volume during the year declined by roughly 35% from 2022 levels.
Looking forward to 2024, we expect the year to have a slow start but then gradually accelerate, ultimately landing with a much stronger finish. The U.S. may in fact avoid a recession, with very slow growth in the first two quarters followed by more significant economic growth in the third and fourth. We expect RevPAR to increase in 2024, albeit at a lower rate than that experienced in 2023. We may see a rate cut by the Fed by the summer if the anemic economic growth pattern predicted by many economists takes hold in the first half of the year. The cut may help fuel an additional layer of transaction activity in the hotel industry and other real estate sectors.
More sellers are likely to bring hotels to market in 2024 as debt maturities are reached, PIP delays are exhausted, unavoidable defaults occur, or, conversely, successful post-pandemic business plans are completed. In the case of the latter, owners may become ready to sell high-cash-flowing hotels in order to move onto other opportunities at this point in the cycle. Now is certainly the time to buy. With fewer buyers in the market and financing more difficult to come by, hotels are receiving fewer offers. This less-frenzied environment leads to more normalcy in transacting and a higher likelihood that parties can get to a successful closing that not only satisfies the seller but also leaves the buyer in a position to implement a business plan for real value growth. The cost of debt may be high and may require heightened due diligence, but a refinance down the road coupled with an eventual sale after the implementation of that business plan (selling at a time when cost of debt will likely be lower than today) would likely lead to very favorable returns. We expect a more active year of transactions ahead and a relatively stable hotel operating environment.
In 2023, the Caribbean has reached an all-time high in the major hotel performance metrics: occupancy, ADR, and RevPAR. RevPAR for most islands experienced double-digit growth when compared to 2019, driven by exponential ADR growth. Air passengers and cruise arrivals are on pace to exceed 2019 levels. While the majority of travelers are still visiting the Dominican Republic, Jamaica, Puerto Rico, and the Bahamas, an increase of airlift and new airlines in the region have allowed for more visitation to some of the smaller islands. In addition to the record performance metrics, there is less demand seasonality than ever before, with previously off-season months now displaying higher than typical occupancy levels. The region also benefited from minimal hurricane disruption during 2023, positively affecting the annual performance.
Going forward, despite the record performance metrics and visitation from both air and sea that will be achieved in 2023, the region still has its challenges to work through. Interest in new hotel and resort developments is prevalent as demand continues to outpace supply; however, developers are facing a challenging financing environment to get new projects off the ground and are having to be more creative with their capital stack. In addition, increased insurance costs have proven to be challenging for new development. However, despite these ongoing issues, the Caribbean continues to shine as new air routes continue to be added to the region and cruise ships continue to add new ports of entry. The outlook is favorable for additional ADR and demand growth in 2024, barring any natural disasters.
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