HOTELIERS WHO ENTERED the lodging business after 2009, the industry’s trough in the Great Recession, are most likely reaping financial rewards from their investments. Those who have been in the industry since before the 2007 crash in banking and real estate, however, may have seen very little real gain in revenue and profit.
So say researchers with CBRE Hotels’ Americas Research who have released a study that shows the ups and downs of industry performance across lodging sectors over 10 years. Robert Mandelbaum and Keval Rama conclude that while most hotel investors have seen nominal gains, strong growth did not occur in every hotel segment. (Nominal gains are not adjusted for inflation. Real value takes inflation into account.)
Hotels’ Americas Research looked at the operating performance of “thousands of hotels” in its database, said the report. It studied same-store samples of data for six different property types and found different levels of recovery in each segment and for different reasons. For example, franchise costs ate into the profits of branded limited-service and extended-stay hotels while resort hotels saw the most gain because they controlled labor costs by reducing staff sizes, an operating strategy limited-service and extended-stay properties found hard to emulate.
“Full-service, limited-service and extended-stay hotels were able to exceed previous peak levels of revenue by 2013, while resorts, all-suite, and convention properties lagged until 2014. All property types surpassed 2007 GOP [gross operating profit] levels in 2014, except convention hotels which did not do so until 2015,” says the report.
“From 2007 through 2017, limited-service and extended-stay hotels enjoyed the greatest nominal growth in total operating revenue of 23.4 and 22 percent, respectively. Unfortunately, these property categories were unable to translate the strong recovery on the top-line to the bottom-line. During the 10-year period, GOP levels grew by just 12.2 percent on a nominal basis at limited-service hotels and 20.4 percent at extended-stay properties.
“The majority of limited-service and extended-stay hotels in our sample are chain-affiliated. Therefore, with such strong revenue growth, it appears that the franchise-related costs (which are tied to changes in revenue) had the greatest influence on limiting flow-through at these two property categories.
“Resorts achieved the greatest nominal gain in GOP during the study period. They converted an 18.5 percent increase in revenue to a 26 percent gain in profits. Full-service and all-suite hotels also achieved GOP growth greater than revenue growth during the 10-year period. By reducing service levels at food and beverage outlets, combined with the relative ability to control labor costs (compared to limited-service and extended-stay hotels) operating efficiencies have been enhanced throughout these property types.
“Convention hotels have been lagging in both nominal revenue and profit growth. Operators at these hotels took advantage of the cost control measures previously mentioned, and limited operating expense growth to just 12.6 percent over the past 10 years. Unfortunately, convention hotels experienced the least growth in revenues (11.3 percent) and, therefore, GOP at these large properties are up just 9 percent on a nominal basis from 2007.”
Mandelbaum is the director of research information services for CBRE Hotels’ Americas Research. Rama is a research analyst with CBRE and a member of the Class of 2021 at Cornell University School of Hotel Administration. Read the full article here.