U.S. hotel revenue growth is slowing down, while expenses are on the rise. According to CBRE Hotels' Americas Research's 2016 edition of Trends® in the Hotel Industry, 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.

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

Other Revenues Grow

From 2014 to 2015, 56.9 percent of the hotels in the Trends® sample posted an increase in occupancy, down from the 70+ percent marks posted the prior few years. "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.

86.1 percent of the properties in the sample were able to raise their room rates during the year, while 80.5 percent of the hotels were able to enjoy an increase in revenue per available room (RevPAR). On average, the Trends® sample achieved a RevPAR gain of 4.6 percent.

"In 2015, we saw continued improvement in the growth of other hotel revenue sources beyond the rental of guest rooms. During the year, Food and Beverage Revenue rose by a healthy 6.6 percent, while Miscellaneous Income (former Rentals and Other Income) grew by 25.4 percent," Woodworth added. Because of the strong growth in other revenue sources, Total Operating Revenue for the overall sample increased by 5.3 percent from 2014 to 2015.

Real Expense Growth

"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 percent in 2015, it would imply that hotel operators would benefit in their efforts to control costs."

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

Total labor costs and related expenses grew by 4.6 percent from 2014 to 2015. This was the result of a 5.2 percent increase in the Salaries and Wages (salaries, wages, service charges, contract labor and bonuses) and a 3.0 percent 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 3.0 percent. 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, we saw growth in Management Fees (4.9 percent), Franchise Fees (6.7 percent), and Credit Card Commissions (7.0 percent).

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 percent, while the Cost of Food declined by 3.3 percent. "This is consistent with the declines in both the energy and food price components of CPI in 2015," Corgel added.

Modest Profit Growth

With revenues increasing at a greater pace than expenses, U.S. hotels enjoyed a sixth year of growth in profits. In 2015, Gross Operating Profits (GOP) increased by 6.3 percent, while Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) grew by 3.6 percent.

"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.

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CBRE Hotels is a specialized advisory group within CBRE providing brokerage, valuation, consulting, research and capital markets services to companies in the hotel sector. CBRE Hotels is comprised of more than 375 dedicated hospitality professionals located in 60 offices across the globe.

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CBRE Group, Inc. (NYSE:CBG), a Fortune 500 and S&P 500 company headquartered in Los Angeles, is the world's largest commercial real estate services and investment firm (in terms of 2015 revenue). The Company has more than 70,000 employees (excluding affiliates), and serves real estate owners, investors and occupiers through more than 400 offices (excluding affiliates) worldwide. CBRE offers strategic advice and execution for property sales and leasing; corporate services; property, facilities and project management; mortgage banking; appraisal and valuation; development services; investment management; and research and consulting. Please visit our website at www.cbre.com.

About CBRE Group, Inc.

CBRE Group, Inc. (NYSE:CBRE), a Fortune 500 and S&P 500 company headquartered in Dallas, is the world's largest commercial real estate services and investment firm (based on 2021 revenue). The company has more than 105,000 employees (excluding Turner & Townsend employees) serving clients in more than 100 countries. CBRE serves a diverse range of clients with an integrated suite of services, including facilities, transaction and project management; property management; investment management; appraisal and valuation; property leasing; strategic consulting; property sales; mortgage services and development services. Please visit our website at www.cbre.com.