Hotels in the United States are operating at their highest level of efficiency in almost 60 years, according to a recent report. But that doesn’t necessarily mean it’s full steam ahead for hoteliers.
According to the most recent 2018 edition of "Trends in the Hotel Industry" by CBRE Hotels’ Americas Research, total operating revenue increased 2 percent in 2017 for the average hotel in the survey sample. By limiting the growth in operating expenses to 1.9 percent, managers at properties realized a 2.2-percent increase in gross operating profits for the year. The GOP margin for the sample properties increased to 38.3 percent last year, which was the highest profit margin recorded by CBRE since 1960 and indicates valuable operating efficiencies and productivity.
Even so, R. Mark Woodworth, senior managing director of CBRE Hotels’ Americas Research, said in a news release that it’s becoming more difficult for U.S. hotels to increase both revenue and profits. Of the properties in the sample, 59.1 percent saw an increase in total operating revenue in 2017, while just 52.3 percent attained growth in profits. Woodworth said those are the lowest levels observed since the depths of the recession in 2009.
“Hotel owners are the most concerned about slow profit growth. Owners are dependent on profit growth for asset appreciation and their returns on investment,” Robert Mandelbaum, director of research information services for CBRE Hotels’ Americas Research, told Hotel Management “On one hand, with profit margins at high levels, it can be assumed that they are currently receiving strong returns on their investments. However, owners like a ‘growth story,’ and slow growth in profits makes the future story a little less exciting.”
Increasing competition from new supply, muted average-daily-rate growth and upward pressure on labor costs have all worked together to make the operating environment one of the most challenging CBRE has seen since it started tracking industry performance more than 80 years ago.
Cost Concerns
While CBRE noted that hoteliers are managing labor costs quite well—hotels in the sample saw a 1.8-percent increase in labor costs compared to the national average of 3.8 percent—other costs increased 2 percent.
Some of the greatest increases came from the undistributed departments where, in aggregate, expenses grew 2.2 percent, according to CBRE. Compared to the operated departments, undistributed costs are fairly fixed in nature and therefore are not as easily controlled.
One of the most notable cost increases came from utilities, which grew 1.4 percent. While that figure alone isn’t alarming, CBRE noted it’s the first time since 2013 that U.S. hoteliers haven’t benefited from a decrease in utility costs.
But for hotels to achieve profit growth that keeps pace with inflation, expense growth must be limited to 2.6 percent or less over the next few years, according to CBRE. The annual average expense growth rate since 1960 is 4 percent, so hoteliers have a great challenge ahead of them.
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Mandelbaum said now is the time for hoteliers to look at places to cut costs while balancing guest service. For example, some amenities hotels offer might be great to have during times of prosperity but don’t make as much sense when it’s time to be lean.
“At this point in the cycle, as revenue growth slows down, hotel operators need to take a serious look at the guest benefit and profitability of all guest services and amenities,” he said. “A pet or technology concierge may be a nice and unique amenity to offer, but what is the real return on investment?”