U.S. Hotels Profits Rise

Despite Initial Signs of Expense Growth

Results from the 2015 edition of Trends® in the Hotel Industry reveal that U.S. hotels (on a unit-level same-store sales basis) achieved a 12.3 percent increase in net operating income (NOI) during 2014.  This marks the fourth consecutive year of profit growth in excess of 10 percent, a trend that is forecast to continue through 2016.  This six-year period (2011-2016) of continuous double-digit gains on the bottom line will be the longest such streak for the nation’s hotels since PKF Hospitality Research (PKF-HR), a CBRE Company, began tracking the industry in 1937.

In 2014, the average hotel in the PKF-HR Trends® sample achieved a bottom-line profit of $17,849 per available room.  This is nominally greater than their 2007 pre-recession peaks.  In inflation-adjusted terms, profits will exceed 2007 levels in 2015.

The strong increase in unit-level profits was not unexpected.  In April of 2014, PKF-HR forecast a 12.4 percent increase in NOI for the year.  PKF-HR is projecting NOI increases of 13.4 percent in 2015 and another 12.2 percent in 2016.

This 2015 edition of Trends® in the Hotel Industry is the 79th annual compendium of hotel operating statistics.  The 2014 Trends® results are based on a sample of operating statements from approximately 7,000 properties in the U.S. that voluntarily participated in the survey.

Over three quarters of the hotels in the Trends® survey (78.2 percent) reported an increase in profits during 2014.  Five of the six property types in the survey achieved double-digit profits growth during 2014.  The lone exception was convention hotels.  Despite the lag in the recovery of group demand, these large hotels still achieved a very strong 9.2 increase in NOI.  

All Revenues Growing

The 12.3 percent increase in hotel profits during 2014 was enabled by a 6.9 percent gain in total hotel revenue.  This is the strongest gain in total revenue growth since 2007.

On average, rooms revenue (RevPAR) comprised 69.5 percent of the total revenue at the typical hotel in the survey, and the 7.3 percent increase was the main driver of the growth in total hotel revenue.  Strong gains in lodging demand, combined with relatively low levels of new supply in most markets, have put the U.S. lodging industry on a trajectory towards all-time record levels of occupancy.  This provides hotel operators with the opportunity to become more aggressive with pricing.  As we have learned in the past, RevPAR growth driven by average daily room rates (ADR) is the most profitable for hotels.

U.S. hoteliers continue to turn the corner on the lag in the growth of other hotel revenues besides RevPAR.  During 2014, food and beverage sales, along with revenue from other operated departments, increased at a very healthy 6.2 percent pace.  Hoteliers have adapted their food and beverage outlets and recreational offerings to appeal to in-house guests, as well as patrons from the local community.

Initial Signs of Expense Growth

One of the most significant findings of the Trends® survey was the 4.9 percent rise in operating expenses (ExPAR) during 2014 (3.2 percent adjusted for inflation).  The 3.2 percent increase is more than double the pace of real ExPAR growth observed from 2009 - 2013.

Until now, U.S. hotel managers have done a great job controlling expenses compared to historical recovery periods.  The cost control measures instituted during the depths of the great recession in 2009 were carried forward through 2013.  The sharp uptick in expense growth in 2014 initially stood out as a potential threat to profit growth in the future.

Controlling the Controllables

Further investigation of the expense data reveals that U.S. hotel operators were able to effectively manage those cost items for which they have the most control.  Measured on a dollar-per-occupied room basis, real ExPAR growth was just 0.2 percent in 2014.  This indicates that the main drivers of expense growth were items associated with the increase in business volume, or occupied rooms.  Hotels in the U.S. are achieving such high occupancy levels that all their fixed costs are covered.  For the next few years, it will be inflation and variable expenses that will cause increases in ExPAR.

At 44.2 percent of expenses, labor is the single largest cost that hotel managers need to control.  In 2014, the national unemployment rate dropped to 6.2 percent according to the Bureau of Labor Statistics (BLS) which contributed to the 3.6 percent increase in the average hourly compensation rate for workers in the U.S. hospitality industry.

Labor costs for the hotels in the Trends® sample increased by 3.7 percent in 2014, the result of a 3.7 rise in salaries, wages and bonuses, along with a 3.8 percent jump in payroll-related expenses (employee benefits).  During the past 15 years, the benefits component has been the dominant driver of labor costs at U.S. hotels.  Now, it appears that the recent decline in the unemployment rate has had the greatest impact on the salaries and wages paid to hotel employees.

Taking the BLS data into consideration, it appears that hotel managers responded to the rise in labor costs by controlling staffing levels.  In 2014, PKF-HR estimates that the total hours worked by employees at the hotels in the Trends® survey grew by a mere 0.6 percent.  Considering that the number of occupied rooms in the sample increased by 3.0 percent, it is clear that operators were able to achieve significant increases in employee productivity during the year.

Absorbing the Uncontrollables

There are some hotel expenses that hotel managers have less control over, and it appears that these costs dominated the 4.9 percent increase in ExPAR observed during 2014.

The fees a hotel pays to credit card, franchise and management companies are typically based on a percentage of revenues and/or profits.  Therefore, since we are in a period of significant revenue and profit growth, it is not surprising that we are seeing a surge in these costs.  In 2014, the combined cost of credit card commissions, franchise fees and management fees increased by 6.5 percent.

Other expenses that influenced the 4.9 percent rise in ExPAR are non-labor maintenance expenses (5.0 percent increase), the cost of goods sold (5.3 percent) and utilities (4.8 percent).  The increases in the amount paid by hotel managers for certain food items and utilities are consistent with the national indices for these commodities.

Mixed Pressures in the Future

The outlook for hotel revenue growth is extremely bright for the next few years.  However, hotel operators will face a variety of tailwinds and headwinds when it comes to controlling their expenses.

Factors that will curb expense growth in the next few years include low levels of inflation, as well as a slowdown in the pace of occupancy growth.  With fewer additional rooms being occupied, the increase in the variable expenses needed to serve the new guests will be limited.

On the other hand, growth in employment levels will continue to put upward pressure on salaries and wages.  In addition, revenue and profit growth will cause increases in credit card commissions, franchise fees and management fees.

PKF-HR believes that hotel operators will continue to adapt to the operating environment as they have in the past.  Fortunately our forecasts of revenue growth exceed our projections of expense growth for the foreseeable future.  It continues to be one of the most prosperous periods for all participants in the U.S. lodging industry.

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Robert Mandelbaum is Director of Research Information Services for PKF-HR, a CBRE Company (www.pkfc.com).  To purchase the 2015 Trends® in the Hotel Industry report, please visit store.pkfc.com.