ATLANTA—The hotel business is booming—for the fourth straight year. If that news isn't good enough, industry researchers are predicting the hotel business will keep driving profit growth in excess of 10% through 2016.

That's according to PKF Hospitality Research's (PKF-HR) 2015 Edition of Trends in the Hotel Industry. On a unit-level same-store sales basis, US hotels posted a 12.3% increase in net operating income (NOI) during 2014. All told, the six-year period from 2011 to 2016 will post continuous double-digit gains on the bottom line to drive the longest streak for US hotels since PKF started tracking these stats in 1937.

“In 2014, the average hotel in our Trends sample achieved a bottom-line profit of $17,849 per available room,” says R. Mark Woodworth, senior managing director of PKF-HR. “This is nominally greater than their 2007 pre-recession peaks, but perhaps of greater importance is that hotel profits, in inflation-adjusted terms, will exceed 2007 levels in 2015.”

These profits were no surprise to PKF-HR. The firm predicted a 12.4% increase in NOI for 2014. Now, PKF-HR is projecting NOI increases of 13.4% in 2015 and another 12.2% in 2016. Over 78% of the hotels in the survey reported an increase in profits during 2014. 

“For a couple of years we have been touting the breadth of the top-line recovery across the entire industry.  Now we are seeing that on the bottom line as well,” says Woodworth. “Five of the six property types in our survey achieved double-digit profits growth during 2014. The lone exception was convention hotels which still achieved a very strong 9.2% in NOI.”

The 12.3% increase in hotel profits during 2014 was enabled by a 6.9% gain in total hotel revenue. This is the strongest gain in total revenue growth since 2007. On average, rooms revenue (RevPAR) made up 69.5% of the total revenue at the typical hotel in the survey. The 7.3% 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,” says Woodworth. “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.”

US hotel brands are turning the corner on the growth lag of other hotel revenues besides RevPAR. During 2014, for example, food and beverage sales, along with revenue from other operated departments, increased at a very healthy 6.2% pace.  Woodworth says 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.

One of the most significant survey findings was the 4.9% rise in operating expenses (ExPAR) during 2014. That's 3.2% adjusted for inflation, over double the pace of real ExPAR growth the industry witnessed from 2009 to 2013.

“Until now, US hotel managers have done a great job controlling expenses compared to previous recovery periods,” says Robert Mandelbaum, director of research information services for PKF-HR. “The cost control measures instituted in 2009 during the depths of the great recession 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.”

A deeper look at the expense data shows US hotel operators managed cost items over which they have the most control. Measured on a dollar-per-occupied room basis, real ExPAR growth was just 0.2 percent in 2014. 

“On the surface, this indicates that the main drivers of expense growth were items associated with the increase in business volume, or occupied rooms,” says Mandelbaum. “We are currently at such high occupancy levels that all of a hotel's 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% of expenses, labor is the single largest cost that hotel managers need to control, according to the survey. In 2014, the national unemployment rate dropped to 6.2% according to the Bureau of Labor Statistics (BLS) which contributed to the 3.6% increase in the average hourly compensation rate for workers in the US hospitality industry.

Labor costs for the hotels in the survey sample increased by 3.7% in 2014. That's the result of a 3.7% in salaries, wages and bonuses, along with a 3.8% jump in payroll-related expenses.

“During the past 15 years, the benefits component has been the dominant driver of labor costs at US hotels,” says Mandelbaum. “It appears that the recent decline in the unemployment rate has had the greatest impact on the salaries and wages paid to hotel employees.”

Against the backdrop of BLS data, it seems 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 survey only grew 0.6%. “Considering that the number of occupied rooms in our sample increased by 3%, Mandelbaum says, it is clear that operators were able to achieve significant increases in employee productivity during the year.”

All that said, there are some hotel expenses that hotel managers have less control over. The survey points to evidence that costs dominated the 4.9% 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,” says Mandelbaum. “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%.”

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

PKF-HR points to several factors that will curb expense growth in the next few years, such as low levels of inflation and 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,” Woodworth says. “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.”