U.S. HOTELS ARE still seeing increasing profits, but to do so they are also having to strictly control their operating efficiencies, according to the 2018 edition of Trends in the Hotel Industry by CBRE Hotels’ Americas Research. Most of that efficiency is in controlling labor costs at a time when skilled labor is becoming scarcer, but also handling increases in utilities and other expenses.
Profits for U.S. hotels rose for the eighth consecutive year in 2017 even while revenue growth slowed, according to the Trends report. The 2 percent increase in total operating revenue seen by hotels surveyed for the report was augmented by a low 1.9 percent rise in operating expenses, leading to 2.2 percent growth in gross operating profits.
The limit on expenses also increased the GOP margin for the Trends sample to 38.3 percent, the highest CBRE has recorded since 1960.
“It is becoming increasingly difficult for U.S. hotels to achieve both revenue and profit gains. Within the 2018 Trends sample, only 59.1 percent of the properties enjoyed an increase in total operating revenue in 2017, while just 52.3 percent attained growth in profits,” said R. Mark Woodworth, CBRE’s senior managing director. “These are the lowest levels observed since the depths of the recession in 2009. Increasing competition from new supply, muted growth in average daily rates, and upward pressure on labor costs make the current operating environment one of the most challenging our firm has seen since we started tracking industry performance in the 1930s.”
The Bureau of Labor Statistics reports the current level of open jobs in the hotel sector equals 5.3 percent of the total personnel currently employed, the highest level since 2000, said Jack Corgel, professor of real estate at the Cornell University School of Hotel Administration and senior advisor to CBRE Hotels’ Americas Research. The tight labor market has forced an increase in wages, which rose 3.8 percent in 2017, according to CBRE. At the same time, total labor costs, including salaries, wages and benefits, reported in the Trends report rose 1.8 percent last year, implying a reduction in the number of hours worked.
“In addition to controlling the schedule, hotel managers gained greater productivity from their staff. With fewer hours, the employees at these same hotels serviced 0.4 percent more occupied rooms, as well as greater volumes of food and beverage revenue,” Corgel said.
Other costs were harder to control in 2017, during which they rose 2 percent, driven by a 2.2 percent increase in undistributed departments that have more fixed costs that are harder to control through management.
“The most obvious cost increase in 2017 was utilities, which grew by 1.4 percent. The 1.4 percent growth rate is not that alarming, but this is the first time since 2013 U.S. hoteliers have not benefited from a decline in utility costs,” Woodworth said.
Increases also came in technology expenditures, franchise fees, credit card commissions and complimentary food and beverage services, along with management fees and property taxes.
“Property owners did find some solace in the 4.2 percent insurance costs decline in 2017. However, given the number of natural disasters that occurred during the year and the sluggish start to the stock market in 2018, we may see a boost in premiums this year,” Corgel said.
Still, the March 2018 edition of CBRE’s Hotel Horizons report forecasts annual RevPAR gains for U.S. hotels from 0.8 percent to 2.5 percent from 2018 through 2020. That means that, in order to grow profits that keep up with inflation, expense growth must be limited to 2.6 percent over the upcoming years, despite the fact that it has averaged 4 percent annually since 1960.
“We are in a very interesting period for hotel owners,” Woodworth said. “On the one hand, lodging revenues seem comparatively durable, and hotels are achieving record level profit margins. On the other hand, a profit growth slowdown amplifies the looming reality that renovation requirements and other capital-intensive needs become more apparent as the current up-cycle persists.”