Report Says Hotel Profit Growth Harder to Come By

Though U.S. hotel profits increased again last year, it is growing increasingly difficult for managers to remain profitable as expenses increase, said CBRE Hotels, Atlanta.

“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 CBRE Hotels Americas Research Senior Managing Director R. Mark Woodworth. “2018 marked the first year since 2009 that expense growth exceeded revenue growth, thus resulting in a slight decline in gross operating profit margin. This is indicative of the struggle managers are having sustaining the effective cost controls that have been in place since the great recession.”

Last year, 59.2 percent of the properties CBRE Hotels surveyed saw revenue gains, but only 54.3 percent realized gross operating profit growth, Woodworth said.

Jack Corgel, Real Estate Professor at Cornell University, Ithaca, N.Y., said average daily room rate growth generally drives hotel profits at this point in the business cycle. “[But] with ADR growth limited to 3 percent or less since 2016, we have seen a concurrent deceleration in the efficiency of the flow of top-line dollars to the bottom line,” he said.

Hotel labor costs are rising faster than other expenses, CBRE said. Last year the amount spent to pay employee salaries, wages and benefits increased 3.1 percent, compared to a 2.4 percent increase for all other operating expenses. Corgel noted with a 50-year low national unemployment rate of 3.9 percent, “there comes a time when something must give,” he said. “With occupancy levels persisting at record high levels, operators must clean more rooms and serve more guests. Automation and productivity enhancements have helped a little, but market conditions indicate that hoteliers must pay the prevailing wage rates, or better, to meet their staffing needs. We do not see this upward pressure on labor costs going away in the near-term.”

CBRE said limited-service hotels with lower labor expenses than full-service hotels achieved the greatest gross operating profit increase among all property types last year. “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. “While limited-service hotels benefited from balanced growth in revenues, the gain in occupancy also brought with it relatively strong growth in expenses. Limited-service hotels saw their operating costs rise by 4.9 percent in 2019, the greatest among all the property-types.”

Corgel noted profit growth has slowed, but pointed out current gross operating profit margins remain 500 basis points above the long-run average and at their highest level since the 1960s. “Therefore, if underwritten properly, owners should be receiving nice returns on their investments,” he said. “Even the slightest gains in profits going forward will maintain these returns.”