ATLANTA—In an era of slowing revenue growth, US hoteliers managed to eke out another year of profit increases by wringing expenses out of their operations. It's an approach that R. Mark Woodworth, senior managing director of CBRE Hotels' Americas Research, advises operators to continue in the near term.

CBRE Hotels' Americas Research is projecting yearly RevPAR growth ranging from 1.7% to 3.0% between now and 2021. Against this backdrop, Woodworth says, “Owners and operators should spend just as much time thinking about expenses as they do RevPAR” over the next few years. “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.”

The newly issued 2017 edition of CBRE Hotels' Trends in the Hotel Industry report, based on a survey of operating statements from thousands of domestic hotels, finds that total operating revenue rose just 2.4% last year, driven by a 0.2% increase in occupancy and a 2.5% rise in average daily rate. Yet operators managed to achieve a 3.7% increase in gross operating profits by holding expense increases to an average of 1.6%.

“The competitive market conditions faced by US hotels in 2016 have been well documented,” Woodworth says. “With the results of the '17 Trends report, we now have an understanding of the impact that the modest revenue gains had on the bottom line.”

It's clear, he adds, that US hotel operators perceived “the threat of stagnant or declining occupancy and slow ADR growth and reacted by controlling expenses. The 3.7% 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.”

Hoteliers kept cost increases to a minimum, CBRE Hotels says, by controlling variable expenses and cutting costs that tend to be more fixed. Given that the typical hotel in the sample experienced an increase in occupancy, it bears mentioning that operated departmental expenses—which are more variable—grew by just 1.7% during the past year. Undistributed expenses increased by just 1.3%.

“With hourly compensation for hospitality industry employees increasing by more than 4.0%, it was somewhat surprising that total labor costs grew by just 2.8 percent for the year,” says John B. Corgel, professor of real estate at the Cornell University School of Hotel Administration and senior advisor to CBRE Hotels' Americas Research. “This implies that managers controlled staffing levels and/or increased productivity. In spite of the noble efforts, for a second year in a row, it was the salary and wages component of labor costs that drove the increase in total labor costs, not employee benefits.”

Labor costs account for about half of a hotel's operating expenses. The other half stems from a variety of fees, commissions and costs for goods and services. In total, the growth of these other operating expenses increased by just 0.3% in '16, says Woodworth and his team.

“Hotel operators benefited from low inflation, as well as a reduction in the costs for items such as food and utilities,” Woodworth points out. “However, as revenues continue to rise, so do the costs for related expenses like credit card commissions, management and franchise fees.”

The one expense line item that stood apart from the crowd was the 6.8% increase in commission payments made to travel agents, OTAs and other intermediaries, he adds. “This is consistent with what we are hearing from our clients.”

Instant Insights /

Hoteliers Squeeze Expenses, Eke Out Profit

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