U.S. hotel profits grow in 2016
U.S. hotel profits increased for a seventh consecutive year in 2016 despite a slowdown in the rate of revenue growth, according to the 2017 edition of Trends in the Hotel Industry by CBRE Hotels’ Americas Research.
Total operating revenue, driven by a 2 percent rise in occupancy and a 2.5 percent growth in average daily rate, increased by 2.4 percent in 2016 for the average hotel, according to the report. However, by limiting the growth in operating expenses to just 1.6 percent, managers were able to extract a 3.7 percent increase in gross operating profits (GOP) for the year.
“U.S. hotel operators saw the threat of stagnant or declining occupancy and slow ADR growth and reacted by controlling expenses,” says Mark Woodworth, senior managing director of CBRE Hotels’ Americas Research. “The 3.7 percent 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.”
The 1.6 percent increase in operating expenses during 2016 was achieved by a combination of controlling variable expenses and cutting costs that are more fixed in nature, according to the report.
Although the growth in U.S. GOP during 2016 was 3.7 percent, location does have an impact on results as well. The report states that GOP growth was strongest for hotels in the Mountain and Pacific (7.0 percent) and South Atlantic (6.1 percent) regions, while properties in the South Central region suffered a GOP decline of 4 percent.
In 2016, there was great diversity in economic performance across the country. For example, in Texas, there is a depressed energy industry, while technology continues to drive the economy in California, according to John Corgel, Ph.D., professor of real estate at the Cornell University School of Hotel Administration and senior adviser to CBRE Hotels’ Americas Research.
Woodworth advises that during the next few years, owners and operators should spend just as much time thinking about expenses as they do RevPAR, and that 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,” says Woodworth.