A Quick Review of 2019 Industry Performance
By Robert Mandelbaum, Director of Research Information Services at CBRE Hotels
Given the extreme negative impact of COVID-19 on the U.S. lodging industry in 2020, we recognize the limited practicality of benchmarking the bleak 2020 operating performance of hotels against the relatively prosperous 2019 benchmarks. Accordingly, this year we provide a brief summary of the results of the 2020 edition of Trends® in the Hotel Industry survey.
According to CBRE's 2020 edition of Trends® in the Hotel Industry, total operating revenue increased by 1.0 percent in 2019 for the average hotel in its survey sample. This is the lowest growth in revenue since recovery from the 2009 industry recession.
More important to hotel owners, 2019 marked the first time since 2009 that the hotels in our Trends® sample suffered a decline in gross operating profits (GOP). From 2018 to 2019, GOP declined on average by 0.6 percent. Resort hotels was the only property type to enjoy an increase in GOP for the year.
For the most part, hotel operators were able to control expenses in 2019. Operating expenses through GOP increased at an annual rate of just 2.0 percent during the year, or half the long-run average of 4.0 percent. This confirms the fact that it was the low revenue growth that hurt the bottom-line in 2019.
Labor costs were the primary driver of the 2.0 percent rise in operating expense. In 2019, the amount spent to pay employee salaries, wages, and benefits at the hotels in the Trends® sample increased by 3.3 percent, compared to the 0.7 percent rise for all other operating expenses. For the year, total labor costs equaled 31.3 percent of total operating revenue and 50.2 percent of operating expenses through GOP.
The greater growth in labor costs was evident in the operated departments where a greater percentage of the workforce is non-exempt and paid on an hourly basis. Within the undistributed departments, non-labor costs increased at a greater pace than labor costs. This implies the costs such as credit card commissions and franchise fees grew at a relatively strong pace. On the other hand, hotels did benefit from declines in the technology and utility departments. Using 2019 Operating Data to Project 2021
CBRE's June 2020 Hotel Horizons® forecasts project that most hotels will be operating at occupancy and ADR levels approximately 15 percent below what was achieved in 2019. Further, health and social-distancing rules and regulations will have a negative impact on other revenue sources such as food and beverage outlets, banquet and meeting, retail, and spa.
Given the expected lower levels of occupancy, ADR and total operating revenue, we encourage hotel owners and operators to use the 2019 financial benchmarks presented in the 2020 Trends® report that most closely align to the anticipated operation in 2021. For example, a full-service hotel that achieved an ADR of $140 in 2019 should utilize the "Full-Service Under $125" data in Figure 10A to provide some guidance on expense and profit ratios for a full-service hotel at lower occupancy, ADR and food and beverage levels.
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* Gross operating profits are defined as income before deductions for management fees and non-operating revenues and expenses.
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