U.s. Hotel Revenue Growing, But Slowing
Hotel operating performance takes a breather in 2015
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. 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.
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. 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). 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. Unfortunately that did not happen.
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. 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.
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.
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About CBRE Hotels
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 over 375 dedicated hospitality professionals located in 60 offices across the globe.
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 (based on 2016 revenue). The company has more than 75,000 employees (excluding affiliates), and serves real estate investors and occupiers through approximately 450 offices (excluding affiliates) worldwide. CBRE offers a broad range of integrated 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.