Profit gains for U.S. hotels slow in 2018

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Profit growth for hotels in the United States is becoming more difficult to attain, although hoteliers did enjoy their ninth consecutive year of increasing profits in 2018. That’s according to CBRE Hotels Americas Research’s most recent edition of its "Trends in the Hotel Industry" report.

According to the data, total operating revenue increased 2.6 percent in 2018 for the average hotel in the sample. Meanwhile, managers were able to limit the growth in operating expenses to 2.8 percent, allowing for a 2.3 percent gain in gross operating profits. The long-run average over the past four decades for expenses growth is 4 percent. However, over the past two years, the average annual growth rate for expenses has been 1.8 percent.

“With revenue growth forecast to slow down in the foreseeable future, owners and operators are beginning to wonder how much more juice is left to squeeze out of their operations,” said R. Mark Woodworth, senior managing director of CBRE Hotels Americas Research. “2018 marked the first year since 2009 that expense growth exceeded revenue growth, thus resulting in a slight decline in the GOP margin. This is indicative of the struggle managers are having sustaining the effective cost controls that have been in place since the Great Recession.”

In 2018, CBRE found that 59.2 percent of the properties in the survey sample saw revenue gains, but 54.3 percent experienced GOP growth.

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Labor expenses, not surprisingly, saw an increase of 3.1 percent for U.S. hotels last year, according to CBRE. This figure is greater than the 2.4 percent gain that happened for all other operating costs. For the year, total labor costs comprised 50 percent of operating expenses through GOP. Except for the 2009 recession, this is the highest that this ratio has been in the past 60 years.

Payroll-related costs of these expenses were the biggest culprit, according to the research. Costs for employee-related benefits grew 3.2 percent during the year.

“Operators are having a tough enough time controlling salaries and wages in a low unemployment environment. It is even more frustrating when the benefits part of the equation, for which they have even less control, is on the rise,” Woodworth said.

Growing Profits, Looking Ahead

Even though profit margins declined, the average hotel in the sample benefitted from a 2.3 percent gain in GOP from 2017 to 2018, according to CBRE.

Limited-service hotels experienced the greatest increase in GOP among all property types during 2018. These hotels were able to translate a 4.3 percent gain in revenue to 3.5 percent growth in GOP. However, limited-service hotels’ occupancy growth also brought strong growth in expenses. These hotels saw their operating costs rise 4.9 percent in 2018, the greatest among all the property types.

“In general, the lower-priced chain scales have lagged in the recovery from the 2009 industry recession, so they are now at a place on the business cycle where they are still able to achieve growth in both occupancy and ADR,” Woodworth said. 

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Resort hotels experienced a 3.5 percent gain in GOP during 2018; however, they did so with a 0.1-percent decline in occupancy and a 4.1-percent gain in ADR. On average, resorts achieved ADR of $257.16 in 2018, which Woodworth said is the highest of any of the property types.

“It also is reflective of another broad trend we observed during the year: the higher the ADR within any given property type category, the greater the gain in GOP,” Woodworth said.

Although profit growth has slowed, Jack Corgel, professor of real estate at the Cornell University School of Hotel Administration and senior advisor to CBRE Hotels Americas Research, said it’s worth noting that current GOP margins are 500 basis points higher than the long-run average and at the highest levels since the 1960s.

“Therefore, if underwritten properly, owners should be receiving nice returns on their investments. Even the slightest gains in profits going forward will maintain these returns,” he said.