If you listen to economists, you might expect the hotel development cycle to start slowing down in light of high interest rates making it unfeasible to build new projects.
Hilton apparently didn’t get the memo.
The hotel giant had plenty of financial bragging rights Wednesday on its third-quarter earnings call, including a $379 million profit. But perhaps the most surprising boastful arc entailed future growth: Hilton’s development pipeline, at 457,000 hotel rooms, is the highest it has ever been.
More than half of that is already under construction, and the company expects to see net room growth increase next year. Hilton anticipates it will grow its portfolio by about 5% this year before rising to between 5.5% and 6% in 2024 — not exactly a signal high interest rates are deterring owners from embarking on a new hotel project.
“We wouldn’t say it if we didn’t believe it,” Hilton CEO Christopher Nassetta said on an investor call Wednesday morning in response to a query about the growth forecast appearing at odds with current construction and financing conditions in the U.S. “It’s possible next year a few things go our way.”
While boosting real estate growth targets might seem like a head-scratcher at a time when construction costs are so high, it’s not entirely out of left field.
Hilton’s new Spark brand, which officially opened its first hotel earlier this month, is expected to quickly bring in a slew of new hotels for the company thanks to it being a conversion brand — owners of existing hotels can renovate, rather than build from the ground up, into Spark affiliation within nine to 12 months.
The company also has a new extended-stay concept, dubbed Project H3, in the works. Home2 Suites, the company’s all-suite extended-stay brand, is the hotel brand with the largest U.S. development pipeline, according to Lodging Econometrics.
Long story short: Travelers are likely to have many additional Hilton options when booking a stay in the coming years.
“When I look at all of the data in a granular way, I think there’s probably more upside potential than downside risk at this point,” Nassetta added.
More Hilton Honors members
The development uptick wasn’t the only growth signal touted by Hilton executives Wednesday. Nassetta also noted the Hilton Honors program is on track to hit 200 million members sometime next year.
By comparison, the Marriott Bonvoy program had 186 million members at the end of September. Bonvoy is also seeing rapid growth, so don’t necessarily take this as a sign Hilton Honors is going to leapfrog over Bonvoy — but it will be worth observing Bonvoy’s growth rate when Marriott reports earnings next week.
Hilton Honors, which currently has more than 173 million members, is 19% larger than it was a year ago, Nassetta said. That’s a big deal, as Hilton Honors members account for 64% of the occupancy at Hilton hotels around the world.
Another new brand is coming
Nassetta also reiterated the company’s plan to launch a luxury lifestyle brand next year. This would mean a Hilton brand that could go head-to-head with Marriott’s Edition brand.
Why does Hilton need another brand? It appears company leaders saw they were losing business to competitors by not having an offering in this space.
“Not only do we want our customers to have more opportunities at the high end, but we’re just giving away, if I’m being honest, we’re just giving away development opportunities,” Nassetta said. “We have owners that are super loyal to us, and many of them want to build a luxury lifestyle hotel, and we don’t really have a product for them.”
But don’t expect this unnamed brand in the works to flood the world with thousands, or even hundreds, of new hotels. Edition launched in 2008, and there are still less than 20. Hilton’s growth trajectory in this sector is likely to look very similar.
“Look at people that have been at it for a long time,” Nassetta said. “You will be fortunate to have dozens of them.”
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