Powering Down: Hotels Are Controlling Utility Costs

According to the 2013 edition of PKF’s Trends in the Hotel Industry report, total operating expenses for the average U.S. hotel increased by 3.3 percent in 2012. During the year, all major expense categories posted an increase from 2011 except for one—utility costs. In 2012, the combined costs for electricity, water, sewer, steam, gas, and other fuels declined by 3.4 percent.

Over the years, annual changes in hotel utility costs have moved in sync with the all-urban consumer energy component of the consumer price index (energy CPI). From 2000 to 2009, the correlation coefficient between these two measurements was 0.964. However, from 2010 to 2012, we saw a departure from this historical symmetry. In 2010 and 2011, hotel utility expenses grew 80 percent less than the energy CPI. Then in 2012, while the energy CPI continued to grow, hotel utility expenditures declined.

Each year since 1933, PKF Hospitality Research has collected annual operating statements from thousands of hotels across the country. Four utility cost categories are captured in the firm’s Trends database: electricity, gas/fuel, steam, and water/sewer. To analyze long-term trends in utility costs, we examined data from a sample of 539 properties that reported data each year from 2000 through 2012. To further explain the 3.4 percent decline in utility costs posted in 2012, we analyzed data from a sample of 4,600 hotels.

From 2000 to 2012, total hotel utility expenses increased at a compound annual growth rate (CAGR) of 2.6 percent. When we remove the last three years of improved controls, the long-term (2000–2009) CAGR for hotel energy costs increases to 3.4 percent. Controlling for changes in business volume, the CAGR for energy expenses measured on a dollar-per-occupied room (POR) basis from 2000 to 2009 was 4.8 percent. Since 2010, the CAGR for energy expenses POR has been a negative 3 percent, thus indicating that many hotel managers have overcome the rise in energy prices by reducing consumption, and/or lowering the fixed component of utility expenses.

Electricity is the largest component of hotel utility costs. In 2012, electricity costs comprised 59.8 percent of total utility expenses, followed by water/sewer (25.2 percent), gas/fuel (11.8 percent), and steam (3.2 percent). Since 2000, water/sewer expenses have increased the greatest on a CAGR basis (5.4 percent). Electricity expenditures, the largest energy cost component, have grown at a CAGR of just 2.2 percent.

Of all the utility categories, water/sewer was the only cost to increase in 2012. During the year, water/sewer expenditures for the survey sample increased by 4 percent. The greatest cost reduction was observed for gas/fuel (-15.2 percent), driven in part by the 10.3 percent decline in the commercial price of natural gas as reported by the U.S. energy information administration. Steam, which is most prevalent in the big cities of the northeast, declined by a healthy 15.1 percent. Payments for electricity decreased by 4.8 percent.

All property types in the Trends sample enjoyed a decline in utility expense during 2012. Large convention hotels, with the greatest amounts of internal air-conditioned space, enjoyed the greatest decrease in energy costs (-4.7 percent). On the other end of the spectrum, resort hotels with excessive amounts of external grounds to manage, achieved the smallest decline in utility costs (-1.9 percent).

Since energy prices and weather conditions vary by region, we examined changes in utility expenditures by geography. Properties located in the New England/Mid-Atlantic region were able to achieve the greatest reductions in energy expenses in 2012. It should be noted that our northeast sample consists of several large hotels located in Boston and New York City that still rely on steam to heat their air and water.

On the other end of the spectrum, hotels in the vast Mountain/Pacific region were only able to reduce their energy costs by 1.5 percent from 2011 to 2012. This region is populated with several mountain and desert resorts. The relative scarcity of water in several western states continues to push the cost of this utility upward. In 2012, a 0.9 percent increase in the energy CPI was met with a 3.4 percent reduction in hotel energy expenditures. Through November 2013, the energy CPI was down 0.8 percent from the first 11 months of 2012. This implies a continuation of favorable energy pricing, thus providing a favorable economic environment for another year of reductions in hotel utility expenditures.

Robert Mandelbaum and Gary McDade work in the Atlanta office of PKF Hospitality Research LLC (www.pkfc.com).