Finance & DevelopmentFinanceSlow Growth Challenges U.S. Hotel Margins

Slow Growth Challenges U.S. Hotel Margins

NEW YORK—Hotel RevPAR will turn negative in the second half of 2017 as weak corporate and decelerating group demand challenge asset owners looking to offset expense growth, Fitch Ratings says. While lodging companies have cited relative leisure strength as an offset to weak corporate transient demand, we believe increasing hotel labor costs will also pressure margins.

Hotels generally need 3 percent or greater RevPAR growth to keep EBITDA margin flat, and 1.5-2 percent RevPAR growth to offset 2-3 percent expense growth to maintain current EBITDA. This rough analysis assumes a 30% hotel EBITDA margin. Fitch has revised its 2017 U.S. lodging industry RevPAR forecast downward by one percentage point on the low end to 0-2 percent. Our revised forecast could be optimistic if lodging industry fundamentals continue to weaken at the current pace.

Marriott International stated in their quarterly earnings call that they would “be thrilled to end up with flat margins” next year, given the challenging RevPAR climate. Other lodging companies agree that while the climate may be tricky, they are fine-tuning efficiencies and cutting costs that don’t negatively impact products or services.

Labor comprises the largest component of hotel property-level expenses, at roughly 60 percent so any significant increase would create challenges. That said, Fitch expects hotel labor costs to increase by 2-4 percent next year due to tight labor markets and minimum wage increases. Changes in overtime rules are also selectively raising labor costs. Highly unionized labor markets, such as Manhattan, will tend toward the high end of the range. Some hotels have tried to mitigate the rising cost of labor by tightening scheduling and overtime controls, while others have tried clustering staffing and consolidating services where possible.

In their quarterly earnings conference call, LaSalle Hotel Properties stated that while wages and benefits continue to increase overall, a bigger issue could loom in another area: “That’s not as big of an issue for us outside of food and beverage, but it’s possibly an impact in food and beverage in many markets.”