Guest – Can You Spend A Dime? - Hotels Struggle To Get Extra Spend In 2012
By Robert Mandelbaum, Director of Research Information Services at CBRE Hotels
The highlight of the recovery from the 2008/2009 industry recession has been the strong return of lodging demand. According to Smith Travel Research (STR), occupancy levels at U.S. hotels increased from a low of 54.5 percent in 2009 to 61.4 percent in 2012. With occupancy levels approaching the long-run average, hotel managers have become more aggressive with their pricing policies. Average Daily room Rates (ADR) rose 4.2 percent in 2012, and are forecast to nominally eclipse the pre-recession peak ADR in 2013. Gains in both ADR and occupancy resulted in a 6.8 percent growth in RevPAR for all U.S. hotels in the STR sample during 2012.
experienced from other revenue generating sources within their hotels?
Other Revenue – Slow
Based on a sample of operating statements collected from approximately 6,500 hotels
This finding is consistent with other research conducted by PKF-HR. According to ourannual survey of meeting planners for ConventionSouth magazine, as well as discussions with corporate travel planners, these professionals have reconciled that rising occupancy levels have led to limited availability, thus requiring higher room rates. However, to keep control of their meeting and travel budgets, limitations have been placed on the amount their constituents can spend on ancillary services and amenities. We have already seen hotel owners and operators react to this trend by reducing the levels of food and beverage service at their properties, along with an enhanced focus on building select-service hotels.
Variable Costs Contained
Facing the challenge of boosting their revenue, hotel managers responded once againby controlling costs. Total hotel operating expenses  for the properties in the Trends® sample increased by 3.3 percent in 2012, compared to the 4.3 percent rise observed in 2011. Because of the high degree of variable costs at hotels, part of the decline in the pace of expense growth can be attributed to the reduced pace of occupancy increases. Nonetheless, when measured on a POR basis, operators were able to limit expense growth to just 1.5 percent in 2012.
In 2012, labor related expenses accounted for 45.3 percent of total operatingexpenses. Total labor costs increased by 3.6 percent in 2012, down from the 4.1 percent growth rate posted in 2011. This implies that managers monitored employee compensation closely during the year. In 2012, salaries and wages (the more controllable component of labor costs) increased by 2.9 percent, while payroll-related expenses (benefits) rose by 5.4 percent. Many U.S. hoteliers are concerned that this could be a foreshadowing of future escalation in government mandated taxes and benefits.
With labor costs being the most significant component, operated department expensesincreased by just 3.5 percent in 2012. With revenues growing faster than expenses, operated department profits grew by a healthy 6.0 percent.
Fixed Expense Growth Explained
In general, undistributed expenses are considered to be more fixed in nature comparedto the operated departmental costs. Therefore, at first glance, the 5.3 percent rise in sales and marketing expenses, along with the 5.0 percent increase in management fees, appear to be a cause for concern. However, it should be noted that changes in revenue and profits influence these two expense categories. Franchise fees (considered a sales and marketing expense), as well as sales personnel bonuses, rose in large part because of the increases in rooms revenue. Management fees are almost exclusively driven by changes in revenues and profits, thus explaining the relatively strong growth in this expense item.
The greatest percentage change in an individual expense category was observed ininsurance. The amount paid by hotels for property and liability insurance grew by 6.0 percent in 2012. According to the firm Swiss Re, 2011 saw the second greatest dollar volume of worldwide insured losses ever. It appears that the insurance companies needed to recoup their 2011 outlays by raising premiums in 2012.
On a positive note, utility costs declined by 3.4 percent from 2011 to 2012. We attributethis reduction to the continued implementation of green and sustainable operating practices, the purchase of energy efficient equipment, and, according to the Bureau of Labor Statistics, a 0.9 percent increase in energy costs during the year.
Net Operating Income (NOI)1 for the average hotel in our Trends® samplegrew by 10.2 percent in 2012. Resort hotels enjoyed the greatest gain in NOI (10.6%), followed by limited-service (10.6%) and full-service (9.8%) properties. Lagging in profit growth were convention hotels (5.7%), suite hotels with F&B (7.7%), and suite hotels without F&B (8.1%). Resort hotels benefited from the greatest increase in ADR, while convention hotels were impacted by the lag in the recovery of the group market segment.
Based on the June 2013 edition of Hotel Horizons®, PKF-HR is forecastingdouble-digit growth in NOI for U.S. hotels through 2015. Strong growth in ADR will be the main catalyst of bottom-line improvement, along with limited growth in expenses. Our outlook for restrained increases in expense growth is driven by Moody's Analytics' forecasts for modest increases in inflation, as well as subdued growth in variable operating costs attributable to the slowdown in the pace of occupancy gains.
Managers will continue to be challenged to grow other revenues sources, especially sincetravelers will be offered an increasing inventory of select-service properties. Alternatively, owners will benefit from increases in the value of their properties resulting from improving profits.
Robert Mandelbaum is Director of Research Information Services for PKF HospitalityResearch, LLC. He is located in the firm's Atlanta office (www.pkfc.com). To purchase a copy the 2013 Trends® in the Hotel Industry report, please visit www.pkfc.com/buyannualtrends. This article was published in the June 2013 issue of Lodging.
Director of Research Information Services
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.
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