STR, CBRE: Strong Hotel Results, but Austerity Looms

Hotel sector revenue and house profit reached new records in 2016–but hotel owners will need to watch expenses to remain profitable, new reports said.

Hotel revenues topped approached $200 billion last year, up nearly $9 billion from 2015, reported STR, Hendersonville, Tenn. Total industrywide house profit exceeded $76 billion.

But house profit fell year-over-year compared to 2015’s 11.1 percent growth rate and total revenues increased just 4.5 percent last year after rising 8.1 percent in 2015, STR reported.

“Inflation-adjusted revenues topped the previous peak, and real house profit levels were the second-highest we’ve seen,” said STR Director of Financial Performance Joseph Rael. “However, in the past year, we’ve also seen revenue growth slow considerably throughout the country. With revenue per available room growth forecasted below 3 percent for the next couple of years, we only expect modest profit increases in the short term.”

CBRE Hotels Senior Managing Director R. Mark Woodworth noted that U.S. hotel operators saw the threat of stagnant or declining occupancy and slowing room rate growth and reacted by controlling expenses last year. By limiting operating expense growth to just 1.6 percent, hotel managers extracted a 3.7 percent increase in gross operating profits for the year, he said.

“The 3.7 percent increase in profits is the lowest we have observed since the Great Recession, but was a commendable accomplishment given the upward pressures on labor and distribution costs,” Woodworth said.

Though gross operating profit increases averaged 3.7 percent, different regions reported significant differences, CBRE Hotels said. Gross operating profit growth was strongest for hotels in the mountain/pacific (7.0 percent) and south Atlantic (6.1 percent) regions while south central region properties saw a 0.4 percent gross operating profit decline.

“We constantly advise our clients to pay attention to their local markets,” said Cornell University Real Estate Professor Jack Corgel. “In 2016, there was great diversity in economic performance across the country. In Texas, there is a depressed energy industry, while technology continues to drive the economy in California.”

Corgel noted that hourly compensation for hospitality industry employees increased by more than 4 percent in 2016. So he called it “somewhat surprising” that total labor costs grew by just 2.8 percent for the year. “This implies that managers controlled staffing levels and/or increased productivity,” he said.

For the second consecutive year the salary and wages component of labor costs drove increased labor costs rather than employee benefits, Corgel said.

“During the next few years, owners and operators should spend just as much time thinking about expenses as they do revenue per available room,” Woodworth said. “Effectively managing those two metrics will dictate the profitability of their operations. Ultimately, it is bottom-line profits that influence values, stimulate transaction activity, pay the debt and provide returns for owners and investors.”