Cornell: Likely Boost for Hotel Profits

U.S. hotels can maintain or increase profits even if inflation and labor costs rise, reported the Cornell Center for Hospitality Research, Ithaca, N.Y.

Room rate increases can match and even outpace expense growth, Cornell Professor Jack Corgel said. 

“Two things make this possible,” Corgel said. “First, the hotel business depends largely on leisure guests and these people will have more money for traveling as their incomes rise. Second, hotels alone among real estate categories can raise rates to overcome the higher expenses caused by increased wages.” 

Corgel said longer-term leases restrain price increases in other commercial real estate types and noted that all real estate types see delivery lags because supply additions require considerable lead time. “Thus we see that late-cycle nominal changes in hotels’ average daily rate historically have well exceeded inflation,” he said. 

Indeed, both average daily room rates and revenue per available room increased in the second quarter, reported STR, Hendersonville, Tenn. ADR increased 2.9 percent year-over-year to $124 and RevPAR increased 3.5 percent to $86.

“Demand and occupancy were the highest STR has ever recorded for a second quarter,” said STR Senior Vice President for Operations Bobby Bowers.

Bowers said hotel industry demand outpaced supply during the second quarter, up 2.1 percent compared to 1.5 percent, respectively.

Corgel cited the economic principle the Phillips Curve, which says that inflation and employment have an inverse relationship. The U.S. unemployment rate has declined to below 5 percent and wages as measured by the Employment Cost Index grew between 2.5 and 3 percent during the past 12 months. But general inflation remains below what might be expected this late in the cycle, he said. He noted that eventually low unemployment means that wages must increase to attract workers. But he said hotels can raise rates to match or exceed the effects of wage inflation even as labor costs increase late in the economic cycle.

“My analysis anticipates that in the coming months hotel owners should be able to improve real profits to a greater extent than other types of real estate ownership,” Corgel said.