United States hotel revenue growing but slowly

DoubleTree by Hilton Hotel New York - Times Square South

DoubleTree by Hilton Hotel New York – Times Square South

United States hotel revenue growing but slowly

U.S. hotel revenue growth is slowing down, while expenses are on the rise. According to CBRE Hotels’ Americas Research’s 2016 edition of Trends® in the Hotel Industry, operating performance continued to improve in 2015, but at a much slower pace. Trends® is the firm’s annual survey of operating statements from thousands of hotels across the nation. The data for the 2016 survey was processed in accordance with the new 11th edition of the Uniform System of Accounts for the Lodging Industry.

“After five years of strong increases in occupancy, average daily rate (ADR) and profits, U.S. hotels reached the top of the current business cycle in 2015,” said R. Mark Woodworth, senior managing director of CBRE Hotels’ Americas Research. “Therefore, it is not a surprise that Total Operating Revenues grew just 5.3 percent from 2014 to 2015. What stands out as a concern for hotel owners and operators was the 4.7 percent increase in expenses, especially during a year when inflation was just 0.1 percent.”

Other Revenues Grow

From 2014 to 2015, 56.9 percent of the hotels in the Trends® sample posted an increase in occupancy, down from the 70+ percent marks posted the prior few years. “This clearly is an indicator that hotels are approaching the top of the cycle when occupancy is at near capacity levels, and in certain markets the negative consequences of new supply growth are being felt,” said Woodworth.

86.1 percent of the properties in the sample were able to raise their room rates during the year, while 80.5 percent of the hotels were able to enjoy an increase in revenue per available room (RevPAR). On average, the Trends® sample achieved a RevPAR gain of 4.6 percent.

“In 2015, we saw continued improvement in the growth of other hotel revenue sources beyond the rental of guest rooms. During the year, Food and Beverage Revenue rose by a healthy 6.6 percent, while Miscellaneous Income (former Rentals and Other Income) grew by 25.4 percent,” Woodworth added. Because of the strong growth in other revenue sources, Total Operating Revenue for the overall sample increased by 5.3 percent from 2014 to 2015.

Real Expense Growth

“History has proven that hotels are an expensive business to operate. Over the years, annual changes in operating expenses have averaged roughly twice the pace of changes in the Consumer Price Index (CPI),” said John B. (Jack) Corgel, Ph.D., professor of real estate at the Cornell University School of Hotel Administration and senior advisor to CBRE Hotels’ Americas Research. “Therefore, with a CPI increase of just 0.1 percent in 2015, it would imply that hotel operators would benefit in their efforts to control costs.”

Hotel expenses increased by 4.7 percent during the year, or 4.6 percent in real terms. The 4.6 percent increase in real expense growth was the greatest annual change in the past 20 years. Two categories that contributed to the extraordinary rise in operating expenses were labor and fees.

“In 2015 the Bureau of Labor Statistics reported a third consecutive year of hospitality industry compensation growth greater than 3.0 percent. This sustained increase in hospitality compensation primarily is attributable to the continued decline in the nation’s unemployment rate,” Corgel noted. “Additional stress on hotel Salaries and Wages is coming from a rise in legislation regarding minimum wage, living wage, overtime rules, and joint-employment regulations.”

CBRE did observe a decline in some operating expenses for U.S. hotels from 2014 to 2015. During the year, hotel Utility Costs fell 2.7 percent, while the Cost of Food declined by 3.3 percent. “This is consistent with the declines in both the energy and food price components of CPI in 2015,” Corgel added.

Modest Profit Growth

With revenues increasing at a greater pace than expenses, U.S. hotels enjoyed a sixth year of growth in profits. In 2015, Gross Operating Profits (GOP) increased by 6.3 percent, while Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) grew by 3.6 percent.

“After years of achieving record levels of occupancy and double-digit growth in profits, U.S. hotels appear to have taken a breather in 2015. However, it should be noted that the industry is not out of breath. Our Hotel Horizons® forecasts call for continued RevPAR growth in the near-term, which should lead to persistent, albeit modest, gains in profits,” Woodworth concluded.

Source = CBRE Group
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