Shares of hotel stocks had a great week this week as economic and inflation news played into the industry's strengths. High-capital-expense businesses like hotels could be among the few beneficiaries of higher inflation, and investors were bidding up the industry as a result.
According to data provided by S&P Global Market Intelligence, shares of Park Hotels & Resorts (PK -1.60%) were up 12.1% this week, DiamondRock Hospitality (DRH -0.74%) was up 11.7%, and Hyatt Hotels (H -1.89%) jumped 10.7%.
The biggest news for the week was consumer prices jumping 8.5% in March versus a year ago. Higher costs for food, energy, and housing were the drivers of inflation, although some costs in energy may already be coming down.
Despite high inflation, the economy seems to be humming along with unemployment at just 2.7% nationwide and wages steadily climbing. What's helpful for hotel companies is that they can raise prices as the costs of other goods increase, but they won't see the same proportion increase in costs, helping margins and the bottom line. In a capital-intensive business like the hotel industry, inflation is actually a good thing as long as hotels stay full.
The one downside is that the Federal Reserve now seems likely to increase interest rates relatively quickly to keep inflation in check, which will increase borrowing costs for companies. But for existing operators, this may also help keep new supply in check just as room rates are starting to go up.
Park Hotels & Resorts announced that occupancy for March 2022 was 63%, up from 53% in February 2022. The company also said it will accelerate plans to open a hotel in San Francisco. Management called it a "broad-based recovery" for the business, and this seems to suggest that demand has remained strong despite high inflation in the U.S. economy.
The hotel business has been tough the last two years, but there appears to be a light at the end of the tunnel for operators. That's great news for investors, and demand seems to be coming back as the price of everything is going up. That could be a double tailwind for the hotel industry in 2022 and beyond.
One caution I'll point out is the potential for a recession if inflation continues and the Federal Reserve boosts interest rates quickly. That doesn't seem to be a huge risk to the business today, but it's worth keeping an eye on. That said, it does seem hotels will be some of the biggest beneficiaries of the current high inflation and strong economy for as long as it lasts.