CBRE: U.S. Hotel Revenue Growing, But Slowing

ATLANTA—U.S. hotel revenue growth is slowing down, while expenses are on the rise, a study shows. CBRE Hotels’ Americas Research’s 2016 edition of Trends in the Hotel Industry has revealed 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, according to the company.

“After five years of strong increases in occupancy, 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% from 2014 to 2015. What stands out as a concern for hotel owners and operators was the 4.7% increase in expenses, especially during a year when inflation was just 0.1%.”

From 2014 to 2015, 56.9% of the hotels in the Trends sample posted an increase in occupancy, down from the more than 70% marks posted the prior few years, according to the report. “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.

In addition, 86.1% of the properties in the sample were able to raise their room rates during the year, while 80.5% of the hotels were able to see an increase in RevPAR. On average, the Trends sample achieved a RevPAR gain of 4.6%.

“In 2015, we saw continued improvement in the growth of other hotel revenue sources beyond the rental of guestrooms. During the year, food and beverage revenue rose by a healthy 6.6%, while miscellaneous income (former rentals and other income) grew by 25.4%,” Woodworth added. Due to the strong growth in other revenue sources, total operating revenue for the overall sample increased by 5.3% from 2014 to 2015.

“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% in 2015, it would imply that hotel operators would benefit in their efforts to control costs.”

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

Total labor costs and related expenses grew by 4.6% from 2014 to 2015, which is a result of a 5.2% increase in the salaries and wages (salaries, wages, service charges, contract labor and bonuses) and a 3% rise in payroll-related expenses (employee taxes and benefits). This is only the second time since 2000 that the salary and wage component of labor costs increased at a greater pace than payroll-related expenses.

“In 2015 the Bureau of Labor Statistics reported a third consecutive year of hospitality industry compensation growth greater than 3%. 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.”

The fees a hotel pays to credit card, franchise and management companies are influenced heavily by changes in revenues. Since rooms, food and beverage and total operating revenue all increased in 2015, CBRE saw growth in management fees (4.9%), franchise fees (6.7%) and credit card commissions (7%).

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%, while the cost of food declined by 3.3%. “This is consistent with the declines in both the energy and food price components of CPI in 2015,” Corgel added.

With revenues increasing at a greater pace than expenses, U.S. hotels enjoyed a sixth year of growth in profits, according to the report. In 2015, gross operating profits (GOP) increased by 6.3%, while EBITDA grew by 3.6%.

“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.