Every eight to ten years, two things occur in the U.S. lodging industry—a performance cycle comes full circle and revisions to the Uniform System of Accounts for the Lodging Industry (USALI) are implemented. Both of these factors influenced the information found on U.S. hotels’ 2015 operating statements.
After five years of strong increases in occupancy, average daily rate (ADR), and profits, U.S. hotels are approaching the top of the current business cycle. While performance continued to improve in 2015, it was at a much slower pace.
Complicating the analysis of the 2015 operating results was the application of the 11th edition of the USALI. Given the new standards for the documentation of revenues and expenses, comparisons with historical performance are difficult and a full understanding of what occurred in 2015 is somewhat muddled.
What is clear, however, is the fact that revenue growth is slowing down, while expenses are on the rise. In the paragraphs that follow, we present the highlights of CBRE Hotels’ Americas Research’s 2016 edition of Trends in the Hotel Industry, our firm’s annual survey of operating statements from thousands of hotels across the nation.
Growth and Expenses
From 2014 to 2015, 56.9 percent of the hotels in the Trends sample posted an increase in occupancy, down from the 70 percent the last few years. Occupancy levels nearing capacity are a clear indicator that hotels are approaching the top of the cycle. Additionally, in certain markets, the suppressing impact of new supply growth is being felt.
Fortunately, 86.1 percent of the properties in the sample were able to raise their room rates during the year. Accordingly, 80.5 percent of the hotels were able to enjoy an increase in revenue per available room (RevPAR). On average, the Trends sample achieved a RevPAR gain of 4.6 percent.
In 2015 we also saw continued improvement in the growth of hotel revenue sources beyond guestroom rentals. During the year, food and beverage revenue rose by a healthy 6.6 percent, while miscellaneous income (former rentals and other income) grew by 25.4 percent.
It should be noted that the strong increase in miscellaneous income can be partially attributable to the movement of resorts fees away from rooms revenue per the new USALI. As expected, the impact of this was greatest on resort hotels where miscellaneous income grew 42.5 percent. However, the offset impact of the removal of resort fee income from rooms revenue was a low 2.4 percent increase in ADR for resort hotels.
Because of the strong growth in other revenue sources, total operating revenue for the overall sample increased by 5.3 percent from 2014 to 2015.
Hotels are a costly business to operate. Historically, annual changes in operating expenses have averaged roughly twice the pace of changes in the Consumer Price Index (CPI). Therefore, with a CPI increase of just 0.1 percent in 2015, it would imply that hotel operators would benefit in their efforts to control costs.
Unfortunately hotel expenses increased by 4.7 percent during the year, or 4.6 percent on an uninflated (real) basis. The 4.6 percent increase in real expense growth was the greatest annual change in the past 20 years. Two categories that contributed to the extraordinary rise in operating expenses were labor and fees.
In 2015, total labor costs and related expenses grew by 4.6 percent. This was the result of a 5.2 percent increase in the salaries and wages (salaries, wages, service charges, contract labor, and bonuses) and a 3 percent rise in payroll-related expenses (employee taxes and benefits). This is the second time since 2000 that the salary and wage component of labor costs increased at a greater pace than payroll-related expenses. In 2015, the Bureau of Labor Statistics reported for the third consecutive year a hospitality industry compensation growth greater than 3 percent. This sustained increase in hospitality compensation is primarily attributable to the continued decline in the nation’s unemployment rate. Further putting stress on hotel salaries and wages is the increase in legislation regarding minimum wage, living wage, overtime rules, and joint-employment regulations.
The fees a hotel pays to credit card, franchise, and management companies are heavily influenced by changes in revenues. Therefore, since rooms, food and beverage, and total operating revenue all increased in 2015, it is not surprising that we are seeing growth in management fees (4.9 percent), franchise fees (6.7 percent), and credit card commissions (7 percent).
On a positive note, we observed a decline in some operating expenses for U.S. hotels from 2014 to 2015. During the year, hotel utility costs fell 2.7 percent, while the cost of food decreased by 3.3 percent. This is consistent with the declines in both the energy and the food price components of CPI in 2015.
In an effort to keep up with contemporary industry practices, the 11th edition of the USALI created a new undistributed department to provide greater line of site to the rise in technology-related expenses. The “new” department is “Information and Telecommunications Systems.” Per the USALI, all administrative and complimentary telecommunications costs are now recorded in this new undistributed department. The net effect was the suppression of expenses within most operated and undistributed departments in 2015.
