CBRE Hotels - 21 September 2017
In the current market environment of modest growth in revenue, hotel owners and operators are paying extra attention to their operating expenses. Per the June 2017 edition of Hotel Horizons(r), RevPAR growth in the U.S. is forecast to remain under 3.0 percent from 2018 through 2021. Therefore, it will be management's ability to control expenses that will enable profits to grow.One expense that management has less control over are franchise fees. Most of the fees charged by the franchising companies (brands) are assessed as a percent of a source of revenue. Therefore, owners and operators have mixed emotions when franchise-related costs rise. After all, if you are paying more franchise fees, then it is likely that your property's revenue is also on the rise.To assist hotel management and ownership in their assessment of the franchise-related costs they are paying, we have analyzed data from 1,587 U.S. hotels that reported franchise fee payments each year from 2010 through 2016. The data comes from our firm's annual Trends(r) in the Hotel Industry survey of operating statements from thousands of hotels across the nation. Some of these properties are owned and/or operated by a brand. Others license the brand, but are operated independently, or by a third-party management company.In our Trends(r) database we capture four different franchise-related fees on a discrete basis. They are:Royalty PaymentsMarketing AssessmentsReservation FeesGuest Loyalty Program FeesFor this analysis, the sum of these four components comprise "total franchise fees". These are the data that we analyze in this article.The Cost of FranchisingAs noted before, franchise-related fees are typically assessed as a percent of revenue; most frequently rooms revenue. Therefore, it is not surprising that total franchise fees measured as a percent of rooms revenue has remained fairly constant from 2010 through 2016. In 2010, franchise fees averaged 6.8 percent of rooms revenue, or $2,326 dollars per available room (PAR). This metric increased to 7.2 percent in 2016, or $3,381 PAR.Due to the ascending average daily room rates, franchise fee payments on a dollar per available room basis increase as you go up in chain-scale. In 2016, properties in the midscale segment averaged total franchise fees of $1,897 PAR, while luxury hotels paid $3,970 PAR. Conversely, franchise fees measured as a percent of revenue ranged from a high of 9.6 percent for upper-midscale hotels to a low of 5.2 percent at luxury properties.The ComponentsThe increase in franchise fees as a percent of revenue indicates that they have grown at a greater pace than rooms revenue. From 2010 to 2016, total franchise fees increased at a compound annual growth rate (CAGR) of 6.5 percent. Concurrently, rooms revenue for the hotels in the sample experienced a CAGR of just 5.5 percent. By analyzing the four individual components of franchise-related expenses, we can identify those elements that have led the rise in fees, and those that have lagged.In 2016, royalty payments constituted the greatest portion (29.5%) of franchise fees, followed by guest loyalty program fees (27.9%), marketing assessments (25.6%), and reservation fees (17.0%). This differs somewhat from the profile of payments made in 2010 when the largest share went towards guest loyalty program fees (27.3%), and royalty payments were only 26.8%.The increase in franchise fees has clearly been driven by the royalty payment component. From 2010 through 2016, franchise royalty payments have grown at a CAGR of 8.1 percent. This is 260 basis points greater than the growth in rooms revenue during the same period. Guest loyalty program payments (6.8%) also increased at a greater pace than rooms revenue the past seven year. Lagging in growth were marketing assessments (5.9%) and reservation fees (4.2%).Management Structure MattersSixty percent of the properties in the study sample were owned and/or operated by the brand affiliated with the hotel. The remaining forty percent was either managed by the owner (non-brand), or operated by a third-party management company. Between the two management structures, we see differences in both the composition of the franchise fees, and how each component has grown since 2010.In 2016, the components of franchise fee payments were more evenly distributed at the hotels operated by the brand. Since the brand is also earning management fees at these hotels, it can be assumed that they will alter components of the franchise fees as needed to win the management contract. At the brand-operated properties, the greatest share of franchise fees went towards the guest loyalty program (30.7%). However, the greatest growth in franchise fees at these properties since 2010 has occurred in the royalty payment (11.0% CAGR) component. Overall, total franchise fees at brand-operated hotels increased by a CAGR of 6.6 percent from 2010 to 2016, while rooms revenue grew by 5.5 percent CAGR.At the hotels that are self-operated or managed by a third-party company, royalty payments (45.4%) dominate the total dollars paid to the franchisor. Since the brand is not receiving any management fees at these properties, they are less likely to negotiate any reductions in franchise royalty payments. From 2010 to 2016, the component of franchise fees the increased the greatest was the guest loyalty payments (9.2% CAGR). This is significantly greater than the increase in rooms revenue (5.6%) for these properties over the same period. Since the amount paid for guest loyalty program fees is influenced by the benefit received from these programs, it can be assumed that these hotels have received an increasing volume of business from loyalty program guests over the years.Assessing ValueWith the prospects for revenue growth limited for the next few years, hotel owners are paying particular attention to the costs associated with acquiring revenue. They want a better understanding if the investments they are making in distribution channels, management, and their brand are providing a sufficient payback.When assessing the return they are getting for the franchise fees paid to their brands, owners also have the ability to dissect the value of the individual components. This enables them to make more specific comparisons to alternative brands, reservation systems, referral sources, management options, or even soft-brand alternatives offered by the franchisor.
CBRE Hotels - 1 September 2017
Hotel demand has just reached an all-time high in the U.S., according to CBRE Hotels' Americas Research. Occupancy levels and demand for rooms are also buoyant in Europe and Asia Pacific.1Demand for hotel rooms is highly sensitive to business conditions, particularly on the downside.When business revenues and personal incomes are squeezed at the end of the cycle, hotel demand drops away very quickly. Hotel demand has shown strong growth since the middle of 2016, suggesting that business conditions in the U.S., and elsewhere in the world, are robust despite relatively weak GDP growth.But there is more in these data than a solid cyclical upswing.A major structural shift is underway as well. We can see this in Figure 1, where the bounce back in hotel demand after the Great Financial Crisis was large and rapid. Figure 2 analyzes this in more depth.This chart shows the number of hotel rooms sold each quarter in the U.S., divided by the number of people over the age of 16 (my definition of the working-age population). I make this adjustment because the working age population has increased by 38% since 1988, some 70 million people, and I would expect the number of hotel rooms to expand over time, just to accommodate this cohort.So, what are the key takeaways?The number of hotel rooms sold is increasing at a rapid rate, even after controlling for the growth in the working-age population. And, as noted above, it is now at an all-time high.This growth in demand is taking place at the same time as non-hotel lodging is being supplied into the marketplace by online platforms such as Airbnb. Airbnb only accounts for 5% of total hotel rooms sold in the U.S., but when we add it to the hotel total, and express it as a ratio of the working-age population, the true scale of the structural shift becomes clear.Why is hotel and non-hotel lodging in such high demand?The business cycle is more robust than the GDP numbers suggest. Government statisticians can't quite keep track of the increasingly important virtual economy; and, the current recovery, which drives demand for hotel rooms, is stronger than we think. I give this three out of five as an explanation.Demographic change is boosting demand for experiences over physical goods. Older consumers spend a higher proportion of their income on health, education, recreation and leisure. Since 2000, the population of the U.S. over the age of 45 has increased by 45%. Millennials, too, have a high propensity to travel.2 I give this four out of five.Hotels are getting better at delivering a great experience at whatever price point consumers choose. Four out of five.Online platforms such as Priceline, Expedia, Kayak, Trivago, Hotels.com, etc. have made the process of booking hotels incomparably easier, and consumer reviews have increased the transparency of the marketplace. I give this five out of five.Budget airlines have revolutionized global travel. It is now possible to circumnavigate the globe with budget flights for $1,620. Legacy carriers (i.e., non-budget airlines) would charge $3,877.3 Five out of five.What are the implications for real estate?Activity in the hotel sector suggests economic growth is both solid and improving: Investors can take confidence in real estate fundamentals more broadly;The new economy is outpacing the old. Retailers have not had such a good recovery as the hotel sector, but they are in the same marketplace for consumers' discretionary spend. They need to do more on service, offer and experience at every price point to regain market share.As an afterthought, let's not forget that the hotel sector in most of the developed world depends to a much greater extent than other industries on migrant labor. If the flow of migrants is diminished, it is not at all clear that the jobs would be taken up by native-born workers; it's more likely the growth of this highly vibrant sector would be constrained. That would be a shame.For more Ahead of the Curve content, click here.STR, Inc., Hotel Review Report, August 2017.Vicki Gelfeld, American Association of Retired Persons, 2017 Travel Trends presentation, November 2016.Wall Street Journal, Budget Airline Ambitions Remake Global Travel, August 24, 2017.
CBRE Hotels - 23 August 2017
Atlanta -- The U.S. lodging industry will enjoy continued growth in all major metrics in 2018, albeit at a slower pace. Based on the recently released September 2017 editions of Hotel Horizons(r), CBRE Hotels' Americas Research is forecasting year-over-year increases in occupancy, average daily room rate (ADR), rooms revenue (RevPAR), total operating revenue, and gross operating profits (GOP) from 2017 to 2018."As hotel owners and operators begin the process of preparing their 2018 marketing plans and budgets it is vital that they receive critical inputs on what will drive industry performance," said R. Mark Woodworth, senior managing director of CBRE Hotels' Americas Research (CBRE). "Based on our analysis of the economic and operating environments, we believe that U.S. hotels will once again achieve record occupancy levels and continued growth in profits, during the upcoming year."CBRE is forecasting a 0.1 percent occupancy increase along with a 2.3 percent rise in ADR for 2018. The net result is a projected 2.4 percent boost to RevPAR. "The limited growth rates may be disappointing or even troubling for some industry participants. However, 2018 will mark the ninth consecutive year of rising occupancy, something we have not seen since the 1990s. While the slow growth in occupancy does indicate we are at the top of the business cycle, all factors indicate that we are in the midst of a record breaking, sustained period of prosperity for U.S. hotels," Woodworth said. "Like occupancy, CBRE also is projecting a ninth consecutive year of growth in RevPAR, total operating revenue, and GOP in 2018."CBRE also has identified an uptick in new lodging supply. For 2018, CBRE is forecasting a 2.0 percent increase in the number of available rooms. This does exceed the 1.8 percent long-run average annual rate of supply growth as reported by STR. "Historically, we have seen rising supply precede industry downturns. Fortunately, as has been demonstrated for several years now, the economic factors that matter most for hotel demand growth exceeded the changes in supply," said John B. (Jack) Corgel, Ph.D., professor of real estate at the Cornell University School of Hotel Administration and senior advisor to CBRE Hotels' Americas Research. "Looking forward, employment levels and income gains are expected and remain attractive. These movements will result in growing levels of demand and occupancy to counter balance supply growth."Local MarketsThe influence of new supply is somewhat muted when reviewing the national statistics. Supply growth in excess of demand is the reason why 50 of the 60 major markets in the CBRE Hotel Horizons(r) universe are projected to realize a decline in occupancy in 2018. The disparity between the performance of the overall national market and the major local markets is driven by the skew of development activity. Nearly 90 percent of the new hotel rooms entering the U.S. in 2018 will reside in the 60 Hotel Horizons(r) markets. "Now more than ever, the 'street corner business' adage we've always touted applies to the hotel industry. It is very important to gain a thorough understanding of local market conditions when preparing hotel budgets for 2018," Woodworth noted.Despite the increase in competition, the aggregate occupancy levels for the Hotel Horizons(r) markets are forecast to remain above 70 percent through 2021. In 2018, 52 of the 60 markets are projected to achieve occupancies above their long-run average. "Given such lofty occupancy levels, 49 of the Hotel Horizons(r) markets are forecast to enjoy an ADR increase in excess of the projected 2.2 percent rate of inflation. Real ADR growth in the face of declining occupancy speaks to the strength of most U.S. lodging markets," Corgel added.Pushing Profits"In a low revenue growth environment, it is a struggle to grow profits. This is especially true given the labor shortages and resulting upward pressure on compensation rates that our clients are reporting to us," said Woodworth. "If revenues increase at our forecast growth rate of 2.3 percent in 2018, then expense growth needs to be kept to something less than 3.7 percent in order for profits to rise. With the average hourly compensation rate for hospitality employees currently increasing at a pace of 4.1 percent, and labor costs comprising roughly half the costs of a hotel operation, you can see how the math becomes challenging."U.S. hoteliers have overcome this same obstacle in recent years. Profit margins for U.S. hotels have grown each year since 2009 and in 2017 are forecast to be at their highest levels since 1959. "Given their track record, we believe hotel operators will once again control costs sufficiently to allow for profit growth in 2018," Woodworth said.Life at the Top"The market and operating metrics we are seeing at the top of this business cycle are quite remarkable given the 90-plus years our firm has been tracking the U.S. lodging industry. I understand why people are disappointed in the slow pace of growth. However, the fact that we are achieving such strong levels of occupancy and profit margins, combined with the positive economic outlook, makes us very comfortable forecasting sustained growth for the foreseeable future," Woodworth concluded.To assist hotel owners and operators in the preparation of their 2018 budgets, the September 2017 editions of Hotel Horizons(r) for the U.S. lodging industry and 60 major markets can be purchased by visiting:https://pip.cbrehotels.comCBRE Hotels is a specialized advisory group within CBRE providing capital markets, consulting, investment sales, research and valuation services to companies in the hotel sector. CBRE Hotels is comprised of more than 385 dedicated hospitality professionals located in 60 offices across the globe.
CBRE Hotels - 15 August 2017
Based on the results of CBRE Hotels' Americas Research's 2017 edition of Trends(r) in the Hotel Industry, hotel management was able to contain the growth of labor costs in 2016. On average, the combined cost of the salaries, wages, other compensation and benefits paid to both employees and contracted/leased personnel at the hotels in the Trends(r) sample increased by just 2.8 percent during the year. Given in the 3.6 percent rise in compensation, the 2.8 percent growth in total labor costs implies that hotel managers implemented cost saving measures such as reducing the total hours worked at their properties, or improving employee productivity.Despite their best efforts, labor costs still accounted for 90 percent of the 1.6 percent rise in total operating expenses from 2015 to 2016. Further investigation reveals that it was the non-benefit component (payroll) that was the main driver of labor costs during the year. Payroll by itself accounted for 66.8 percent of the 1.6 percent total operating expense growth rate.The CBRE Trends(r) survey tracks five payroll sub-categories within each operating and undistributed department of a hotel. The sub-categories are consistent with the 11th edition of the Uniform System of Accounts for the Lodging Industry (USALI). They are:Salaries and Wages: Non-ManagementSalaries and Wage: ManagementService Charge DistributionContract, Leased, or Outsourced LaborBonuses and IncentivesA sixth sub-category is used to track other compensation data that is not identified, but this totals just 0.6 percent of payroll costs.Analyzing the salaries, wages, service charges, contact/leased labor and bonus payments made by U.S. hoteliers in 2016 provides some insight into how they were able to contain the increase in labor costs to just 2.8 percent. The following paragraphs summarize our analysis of the 2016 labor cost data from 4,028 properties in the Trends(r) sample that provided detailed labor cost information in conformity with the 11th edition of the USALI. For the purposes of this analysis, we are going to refer to the entirety of non-benefit compensation as "payroll."Payroll ComponentsThe salaries and wages paid to non-management personnel comprised 63.8 percent of payroll in 2016, followed by the salaries and wages paid to management (24.1%). The remaining 12.1 percent consisted of service charge distributions, payments to contract/leased labor, bonuses, and unassigned payroll.Non-management salaries and wages measured as a percent of payroll was greatest at limited-service hotels (69.5%), while management salary and wage payments were the most at extended-stay hotels (29.8%). Given the high incidence of mandatory gratuities, it is not surprising the service charge distributions made up the greatest percentage of payroll at convention (6.6%) and resort (6.2%) hotels. All-suite hotels allocated the greatest percent of their payroll dollars to contracted/leased employees (6.7%). Resort hotels, the property type that achieved the greatest gain in gross operating profits (GOP) in 2016, also spent the greatest percent of payroll on bonus payments (4.4%).From 2015 to 2016, the payroll component that saw the greatest percentage increase was service charge distributions (12.3%). In many jurisdictions, management has limited control of these mandatory payments that must be made to employees. The increase in payments made to contact/leased labor (5.4%) exceeded the growth in salaries and wages paid to management (3.0%) and non-management (2.8%). The slowdown in GOP growth most likely contributed to the 5.5% decline in bonus payments made in 2016, compared to 2015.Incidence of ComponentsThe use of contract/leased labor is frequently cited by operators as a tactic that can be implemented to overcome labor shortages, and potentially control the rising costs of compensation. In 2015, 42.7 percent of the properties in the study sample reported payments made to contract/leased employees in at least one of their departments. In 2016, this number increased to 45.2 percent. Resort hotels reported the highest incidence payments made to contract/leased employees (67.5%), while extended-stay hotels appear to use contract/leased employees the least (35.7%).Among the operating and undistributed departments, the greatest use of contract/leased employees in 2016 occurred in the food and beverage department (33.7% of hotels), followed by the rooms (33.3%) and administrative and general departments (17.5%). The greatest increase in the use of contract/leased employees was observed in the food and beverage and rooms departments. Conversely, it appears that the use of contract/leased labor declined in the other operated, information and telecommunications, and maintenance departments.Overall, the incidence of paying service charges grew from 17.7 percent of the sample in 2015 to 18.1 percent in 2016. Resort hotels are the property type most likely to pay a service charge to their employees (62.9%). As expected, the distribution of service charges was most frequently observed in the food and beverage department (39.7%), followed by the rooms department (4.6%).While the aggregate dollar amount of bonus payments made by the study sample declined by 5.5 percent from 2015 to 2016, the number of hotels that paid bonuses during the year increased. In 2015, the properties that paid bonuses comprised 89.2 percent of the total sample. In 2016, this metric increased to 89.7 percent.Employees in the sales and marketing (91.6% of hotels) and administrative and general (80.1%) departments were mostly likely to be paid a bonus. This is consistent with the typical compensation agreements for general managers, as well as sales personnel. Least likely to receive a bonus in 2016 were employees in the other operated and information and technology departments.It is interesting to note that the percent of hotels reporting bonus payments made to sales and marketing employees increased from 2015 to 2016, while the percent of hotels reporting bonus payments made to administrative and general personnel declined. In 2016, the number of hotels that enjoyed an increase in rooms revenue was greater than the number of properties the achieved a rise in GOP. Most sales and marketing incentives are based on revenue achievements, while general managers are more frequently rewarded for growth in profits.Payroll PressureGiven the political and economic landscape for the next few years, it appears there will be more pressure on the payroll component of labor costs versus the benefits piece. Accordingly, hoteliers need to pay attention to the increased labor reporting standards introduced in the 11th edition of the USALI. With greater transparency, owners and operators are better able to analyze the many components of labor costs, and act accordingly.1 Before deductions for management fees and non-operating income and expenses.
CBRE Hotels - 13 July 2017
An expense that has consistently grown at pace greater than the average of all other costs from 2010 through 2015 has been management fees. When growth of an expense item exceeds the overall average, owners typically become concerned. However, since management fees are designed to reward operators for positive performance, excessive growth in management fees is not necessarily unwelcome.Most management contracts include two components for compensation - a base fee and an incentive fee. The base fee is typically charged as a percentage of total revenue. Incentive fees, on the other hand, are paid to the management company once a certain profit threshold is reached. Incentive fees are designed to make management more conscious of the bottom line since owners achieve their returns and pay their debts from profits, not revenue.To gain a better understanding of this expense we analyzed the performance of hotels that reported paying a management fee for CBRE Hotels' Americas Research's annual Trends(r) in the Hotel Industry survey of property-level operating statements.The PercentagesFor the hotels that reported paying a management fee in 2015, the combined payments for the base and incentive fees averaged 3.5 percent of total revenue. This expense ratio was the greatest at extended-stay hotels (4.2%), and lowest at suite hotels with food and beverage (2.9%). Relative to the bottom-line, total management fees averaged 15.5% of profits.During the 2010 to 2015 recovery period, management fees typically grew at a faster annual pace than total revenue. In 2015, we observed a departure from that trend, when total revenue grew by 5.3 percent, but total management fees increased by just 5.1 percent. Through 2014, profits maintained their double-digit annual growth rates. Therefore, it can be assumed that the incentive fee component had a significant impact on the growth in management fees. However, when the pace of profit growth slowed down to 7.1 percent in 2015, this would have reduced the increase in the incentive fee component, thus muting the pace of the rise in overall management fee expense.Incentive FeesAs profits have increased, it is not surprising that the incentive fee requirements within management contracts have been met at a rising number of hotels. In 2015, 18.1 percent of the properties in our Trends(r) sample that reported paying a management fee also reported paying an incentive fee. This is up from a low of 5.8 percent in 2009, and 2014's ratio of 14.5 percent.With the number of properties paying a management fee growing from 2014 to 2015, but the pace of management fee payouts slowing down, one can assume the required profit margins, or profit level, needed to trigger the incentive fee are being achieved. However, the magnitude of the growth in profits has diminished, thus limiting the growth in the amount of the management fee payment.As expected, the properties that paid an incentive fee in 2015 achieved greater increases in both revenue and profits. During the year, hotels that reported paying an incentive fee saw their total revenue grow by 6.0 percent, while their profits increased 17.5 percent. At the properties that did not pay an incentive fee, total revenue increased by 4.7 percent, while profits grew by 16.3 percent.When analyzing incentive fee payment data over the two year period 2014 and 2015, we see that the intended "incentive" for management companies appears to be working. Properties that paid an incentive fee in 2015, but not in 2014, saw their profits increase by 30.3 percent in 2015. Conversely, for properties that paid an incentive fee in 2014 but not in 2015, profits increased by 20.4 percent in 2015.Given the relatively strong 20.4 percent increase in profits achieved at hotels that did not pay the incentive fee in 2015 after paying in 2014, it can be assumed that the incentive management fee requirements at these properties are very strict. Alternatively, the management contract for this group may have a revenue component to them. The revenues for the hotels that paid a management fee in 2014 but not 2015 suffered a 1.2 percent decline in total revenue during the period.Keeping Management MotivatedThe expected operating environment for U.S. hotels for the next few years is one of limited growth in both revenues and profits. Therefore, both owners and operators should brace for subdued growth in their respective paybacks: returns for owners and management fee income for the management companies.With revenue growth expected to be muted over the next few years, management companies will be even more incentivized to boost profit growth in order to earn more income for themselves. However, with profit margins currently well above long-run averages, and labor costs on the rise, growing profits will be a challenge. For owners that signed contracts with profit-based incentive clauses, these contract terms may prove to be of great value over the next few years.
CBRE Hotels - 2 June 2017
In this video Robert Mandelbaum , Director of Research Information Services for CBRE Hotels' Americas Research, discusses the highlights of the firms' 2017 Trends (r) in the Hotel Industry report. In 2016, U.S. hotel operators were able to extract a 3.7 percent gain in gross operating profits from a 2.4 percent increase in total operating revenue. This was accomplished by controlling the rise in operating expenses to just 1.6 percent.Click here if the video doesn't display
After Strong First Quarter, CBRE Forecasts Eighth Consecutive Year of Occupancy Growth for U.S. Hotels
CBRE Hotels - 23 May 2017
Atlanta -- The U.S. lodging industry started 2017 on a strong note. During the first quarter of 2017, hotel demand increased by 2.8 percent. The result was an occupancy of 61.1 percent, the highest first quarter occupancy rate reported by STR in the past 30 years."Since bottoming out in the fourth quarter of 2009, U.S. lodging demand now has grown for 29 consecutive quarters, and led to the record occupancy levels we currently are observing," said R. Mark Woodworth, senior managing director of CBRE Hotels' Americas Research (CBRE). "We realize that favorable prior year comparisons contributed to the strong growth in first quarter demand, and that pace cannot be sustained through the rest of 2017. However, given the positive economic outlook for the remainder of the year, we are projecting demand to outpace supply once again in 2017, thus resulting in an eighth successive year of occupancy growth for the U.S. lodging industry."According to the recently released June 2017 edition of Hotel Horizons(r), the supply of available rooms in the U.S. is projected to increase by 2.0 percent during 2017 following a 2016 gain of 1.6 percent per STR. Concurrently, lodging demand is forecast to rise by 2.1 percent. The net result is an increase in occupancy from 65.4 percent in 2016 to a third consecutive annual record occupancy level of 65.5 percent in 2017.Room to Grow"We are in a period of record annual and quarterly occupancy levels. Accordingly, we need to look at specific days of the week, seasons of the year, and markets with new supply to identify when and where new lodging demand can be accommodated," Woodworth stated. "These factors help to guide and explain our forecasts."From 1988 through 2016, the highest U.S. hotel occupancy levels on average have been achieved during the third quarter. This trend continues in 2017 when CBRE is forecasting an occupancy rate of 70.7 percent from July through September. "Because of realistic capacity constraints, third quarter demand growth will be limited to 1.3 percent. Hoteliers should not misinterpret this relatively low level of demand growth and distort our positive outlook for travel this summer," Woodworth said.While seasonal patterns have been consistent over the years, there has been a shift in lodging performance by day of the week. Per STR, occupancy and ADR levels have grown greater on the weekends versus weekdays since 2000. In fact, U.S. hoteliers are now able to charge higher room rates on Friday and Saturday nights compared to the other days of the week."In 2016, weekend occupancy averaged 71.3 percent, while weekday occupancy was 62.3 percent. This indicates that there is room to accommodate new corporate and group demand, and the outlook for the economic indicators that drive these market segments is quite positive for the next few years," Woodworth noted. DowntownCBRE Hotels' Americas Research not only prepares forecasts for the six U.S. chain-scales, but for six U.S. location categories, as well. When assessing CBRE's forecasts of performance by location category, the robust amount of development activity occurring in urban areas becomes evident."To paraphrase Billy Joel, it's an uptown world for hotel development," said John B. (Jack) Corgel, Ph.D., professor of real estate at the Cornell University School of Hotel Administration and senior advisor to CBRE Hotels' Americas Research. "Developers have been leaping over historical hurdles and getting deals done in the urban core of the nation's major markets." For 2017, CBRE is forecasting the nation's urban areas to experience a 3.4 percent increase in their lodging stock."In our lodging forecasts, it is important to note that we project accommodated demand. Urban developers have tapped into the preferences of today's travelers by building moderate-priced and select-service properties in these urban areas. Accordingly, our forecasts of 3.3 percent demand growth in urban markets almost matches the 3.4 percent increase in supply," said Corgel. For 2017, CBRE is projecting urban hotel occupancy to be 73.0 percent, which ties airport areas for the greatest occupancy level among the six location categories.Still Strong"After so many quarters and years of record breaking performance, plus all the new supply, labor and geo-political challenges, it is not surprising that industry participants are leery regarding the future of the U.S. lodging industry. However, when you take a hard look at the data and scrutinize issues like seasonality, locational variances and weekday/weekend demand patterns, you can see where there still is some upside potential," Woodworth concluded.To purchase copies of the June 2017 editions of Hotel Horizons(r) for the U.S. lodging industry and 60 major markets, please visit: https://pip.cbrehotels.comCBRE Hotels is a specialized advisory group within CBRE providing capital markets, consulting, investment sales, research and valuation services to companies in the hotel sector. CBRE Hotels is comprised of more than 385 dedicated hospitality professionals located in 60 offices across the globe.
CBRE Hotels - 19 May 2017
Per the Uniform System of Accounts for the Lodging Industry (USALI), payments to intermediaries are classified as commissions. In recognition of the rise in intermediaries, the 11th edition of the USALI stipulates two commission expense categories within the rooms department; one for commissions paid for the booking of transient business, and one for commissions paid for the booking of group business. The commissions paid within the rooms department cover sales made for not only guest room rentals, but for any other ancillary revenue associated with those guests. If, however, an intermediary secures business solely for the benefit of the food and beverage department (i.e. local catering business without guest room rentals), then the commission payment is recorded within the food and beverage department.Not included in the rooms department commission expense category are payments made to agents for the rental of commercial space within a hotel. These commission payments are recorded as professional fees within the administrative and general department.In recognition of the rise in intermediaries, CBRE Hotels' Americas Research began to track commission payments within the rooms department starting in 2015. Our firm's Trends(r) in the Hotel Industry database captures the combined commissions paid for both transient and group business. The following paragraphs summarize the magnitude of rooms department commission payments in 2015 for U.S. hotels.A Significant ExpenseOn average, commission payments are the second largest expense within the rooms department, behind labor costs. This ranking does vary by property type. At limited-service and extended-stay hotels, the cost of providing complimentary meals exceeds commission payments. At resort properties, more money is spent on the laundry, linen, and supplies provided in the guest rooms.Measured as a percent of revenue, commission payments averaged 3.0 percent of total rooms revenue in 2015. Unfortunately the metric we do not have access to is the percentage of rooms revenue subject to a commission payment. Therefore, we are unable to calculate the average commission rate charged by travel agents and other intermediaries.Commissions calculated as a percent of rooms revenue were greatest at convention hotels (4.5%). This confirms the increased use of housing companies and other agencies by meeting planners. Historically, hotels would deal directly with the meeting planner, and for the most part not have to pay a commission.Commissions paid as a percent of rooms revenue were lowest at extended-stay properties (2.1%). In this segment, it appears that hotel sales managers are still able to deal directly with the corporate travel executives booking the long-term stays. Given recent trends in the convention segment, extended-stay hotel owners and operators should monitor intermediary activity in their segment going forward. The Dollar AmountBecause of the differences in room rates, the dollar value of the commission paid by a hotel is influenced by the average daily rate (ADR). Therefore, it is not surprising that commission payments measured on a dollar per occupied room (POR) basis tend to follow the ADRs achieved by the various property types and chain-scales.In 2015, convention hotels recorded the highest commission POR payments among all the property types ($8.14), followed by resort hotels ($6.22). When analyzing commissions POR by chain-scale, luxury properties paid the most ($10.25). Not only do luxury hotels and resorts achieve high ADRs, their guests are most likely to use the services of a travel agent.At the low end of commission POR payments are extended-stay ($2.13) and limited-service ($3.35) properties. These hotels achieve relatively low ADRs, and their guests may not be using intermediaries as much as other travelers.Looking ForwardIn an effort to measure the impact of intermediaries on the financial performance of hotels, the American Hotel and Lodging Association's Consumer Innovation Forum is working with several hotel franchising, ownership and management companies to establish metrics that measure the "total acquisition cost" of hotel revenue. Commissions are just one component of this equation. Other components include reservation fees, marketing costs, and other expense incurred to secure revenue.At CBRE, going forward we will be able to monitor annual changes in the commissions paid to intermediaries. This will shed some light on the ability of hotels to control this cost by negotiating more favorable contracts with the intermediaries, or increasing the frequency of guests booking directly with the hotel.tO purchase a copy of Trends(r) in the Hotel Industry, please visit https://pip.cbrehotels.com, or call (855) 223-1200. This article was published in the April 2017 edition of Lodging.
CBRE Hotels - 3 May 2017
They asked, "Should we pay such high prices now, given that the boom may turn into a bust?" As a college professor, I offered the standard response: "It depends, what do you think?" As a hotel market forecaster, I promised to think and write about hotel property market bubbles with regard to their questions, and likely those of others, about current pricing in local markets.Boom and bust experiences over the past few decades--with tech stock prices and housing prices, for example--have generated an avalanche of books and articles about short-term, extraordinary asset pricing volatility. A summary of these writings appears as follows:The grand debate centers on whether asset price bubbles either emerge from rational responses to fundamental stimulants by market participants or from irrational behaviors, such as sentiment and over-optimism, not directly related to fundamentals (see surveys by Glasser and Nathanson, 2014; and Mayer, 2011).The other grand debate involves measurement. The time-honored definition of a bubble is when asset prices markedly depart from fundamental values. The analysis machinery becomes clogged when trying to deal with the term "markedly depart" and further challenged with attempting to compute "fundamental values." Hence, no firm conclusions have been reached about how to detect bubbles ex ante. Ex post detection is far easier, in some cases like a slam dunk into a five-foot-high basket!Credit excesses have been found to be instrumental in the creation of many, but not all, asset market bubble cases (see Levitan and Wachter, 2013). Non-credit causes come in many different flavors. Examples of housing market bubbles from non-credit related causes include supply-side constraints and demand factors such as income instability, and social interaction issues (see Jorda, Schularick and Taylor, 2016).All of the research on real estate bubbles focuses on housing markets except Levitan and Wachter (2013), who laid the blame on mortgage credit excesses in pricing of commercial real estate during the last cyclical peak. To my knowledge, no publications have addressed hotel market bubbles.Positive economics spinNobel Laureate Milton Friedman championed the cause of positive economics in the context of model building by postulating that a model should be evaluated based on how well it predicts rather than on the elegance of its underlying assumptions.An analog for market bubble investigation is that the focus ought to be on timely identification and warning signals instead of whether they originate from rational or irrational behaviors as in much of the academic work on the subject. As a practical matter, it is more important to know when a bubble has formed than how it was formed. Also because of the macroeconomic policy implications, studies predominately examine national market booms and busts. Localized bubbles are not often referenced, but to participants in markets for fixed-location assets such as hotel properties, extraordinary pricing at the city level has important return implications (see Bourassa, Hoesli and Oikarinen, 2016).Bubble measurementWithout the benefit of proof-positive models of fundamental values, the operative metrics become simple ratios of prices divided by incomes. Prices should not markedly depart from incomes in either a long-run average or some relative context. Thus, abnormally large, period-specific ratios signal the possibility of bubble formation.The relevant metric in the stock market is some variation of a price-earnings ratio. For housing markets, the house price-to-household-income ratio is most often applied and found to be most useful (Bourassa, Hoesli and Oikarinen, 2016). The equivalent metric in commercial real estate market cases including hotels logically would be the reciprocal of the capitalization rate (1/R) - the net operating income multiple.Hotel market bubble report cardCBRE Hotels' Americas Research manages a repository of data from in-house collections, STR and RERC that allow for the computation of values for a typical hotel in the U.S. and each of the 60 city markets included in the firm's Hotel Horizons forecasting platform. The values come from income capitalization and can be calculated for the most recent quarter, any quarter in the past several decades, and future periods using NOI and capitalization rate forecasts. (STR is the parent company of Hotel News Now.)Exhibit 1 presents the results of an analysis whereby the value of a typical hotel in each market during Q4 2016 is compared with its corresponding value at the previous market peak--in other words, the quarter of previous peaks differ somewhat by market. Unique indexes are produced for each market. The height of the bars shows how much in percentages that the value indexes changed in real terms during the current recovery and expansion period.Here is the complication: Values are not prices! A price is an observable fact and a value is an estimate from a model designed to predict what a price should be. The two components of values (V) presented in Exhibit 1 are NOI and capitalization rate, where V = 1/R (NOI). If the values mostly come from NOI expansion, then they have a decidedly fundamental origin. If multiple expansion is the main determinant of value, then the pricing (normal or extraordinary) of incomes takes center stage.To this point, the bars in Exhibit 1 are split into two parts such that the darker segment represents multiple expansion and the lighter segment shows the NOI growth contribution. The height of the bars does not portend a hotel price bubble, but instead shows which markets are prone to the largest busts should local conditions suddenly change.(CLICK TO ENLARGE.) Note: For each year in each city, the NOI is estimated from samples of actual property performance in the CBRE Hotels' Americas Research Trends data base is divided by the capitalization rate for each year in each city using RERC and RCA data to obtain value estimates. Previous value peaks were determined and percentage changes from these city-specific peaks relative to 2016 values are computed. Capitalization rate multiples and NOI growth rates are determined by simple proportional allocations.Hotel property values in the U.S. during Q4 2016 stood at 14.6% above the previous peak, yet several city markets shown on the right side of Exhibit 1 did not achieve levels that exceed previous peaks. The threats of bubble collapses and their consequences in most of the top 60 markets do not appear imminent from this evidence.However, eight markets--San Jose/Santa Cruz, California; San Francisco; Nashville, Tennessee; Oakland, California; Dayton, Ohio; Oahu, Hawaii; Portland, Oregon; and Los Angeles--experienced hotel value increases 40% greater than their previous peaks. In another half-dozen or so markets, value increases approached 30%. Markets in the western U.S. dominate the most quickly growing group. Notwithstanding, the contribution from NOI growth far outweighs the contribution from multiple expansion in all of the markets in which value growth exceeds 25%. These data points indicate that the largest local value increases have a fundamental reason to exist!Exhibit 1 presents what happened to property values in U.S. hotel markets in the past. Exhibit 2 shows what CBRE Hotels' predicts will happen to the components that generate value changes, although the actual value changes across the cities are not presented. This scatterplot comes from intersecting the forecast NOI multiple from 2017 through 2020 on the x-axis and the real NOI growth rate for the same future period on the y-axis. If hotel property values are expected to increase more because of real NOI growth, then investors may find more comfort than if multiple expansion is expected to be the engine of value appreciation.The forecast for the U.S., indicated as 13 on the chart, is comprised of approximately 3% multiple expansion and negligible real NOI growth.The markets positioned the farthest out to the right shown in the boxed area are those expected to realize value growth most dependent on multiple expansion. Dayton (1) is forecast to experience value increases based on strong positive changes in its multiples, but also value growth comes from relatively high growth rates in NOI. For Oakland (2), Charleston, South Carolina (7), and Norfolk-Virginia Beach (6), future multiple expansion is among the highest of the major hotel markets in the U.S. and is expected to dominate in contributing to value increases. Hot city markets in California and locations such as Nashville and Oahu that demonstrated large percentage increases in hotel values from the historical pricing perspective are not represented (except Oakland) in the boxed area of Exhibit 2.(CLICK TO ENLARGE.) Note: For each future year 2017-2020 in each city, forecasts of NOI are developed using historical data from actual properties in the CBRE Hotels' Americas Research Trends database and a set of econometric equations created to predict other revenues and various expenses from room revenue. Room revenue forecasts come from CBRE Hotels' Hotel Horizons forecasting platform. To obtain value estimates, these future NOIs are divided by forecasts of capitalization rates for each year in each city using RERC and RCA data and an econometric model of capitalization rates specified with Gordon Growth model components. Future values for model components come from forecasts of capital market rates produced by CBRE's Econometric Advisors and the foregoing NOI forecasting activity (NOI growth rates). Future values are proportionally allocated to real NOI growth and capitalization rate multiple expansion, then plotted.ConclusionReaders always draw their own conclusions from results such as these.My take is the national and city hotel markets by the end of 2016 did not begin floating from an infusion of non-fundamental helium. During the next four years, a handful of markets are forecast to have the hotel property value growth characteristics to justify being on the bubble watch list.ReferencesBourassa, S. C., M. Hoesli, and E. Oikarinen, (2016). Measuring House Price Bubbles. Swiss Finance Institute, Research Paper Series No. 16-01.Glasser, E. L. and C. Nathanson (2014). Housing Bubbles. NBRE Working Paper No. w20426.Jorda, O. M. Schularick, and A. M. Taylor (2016). Bubbles, Credit, and Their Consequences. FRBSF Economic Letters 2016-27 (September).Levitan, A. J. and S. M. Wachter (2013). The Commercial Real Estate Bubble. Harvard Business Law Review 3, 83-118.Mayer, C. J. (2011). Housing Bubbles: A Survey. Annual Review of Economics 3, 559-577.AcknowledgementBram Gallagher, Ph. D., Economist with CBRE Hotels' Americas Research, provided invaluable assistance in the preparation of this report.Jack Corgel, Ph. D., is Managing Director of CBRE Hotels' Americas Research and Professor of Real Estate at the Cornell University School of Hotel Administration.The assertions expressed in this article do not necessarily reflect the opinions of Hotel News Now or its parent company, STR and its affiliated companies. Please feel free to comment or contact an editor with any questions or concerns.
CBRE Hotels - 25 April 2017
Atlanta -- U.S. hoteliers enjoyed a seventh consecutive year of increasing profits in 2016 despite a slowdown in the rate of revenue growth. According to the recently released 2017 edition of Trends(r) in the Hotel Industry by CBRE Hotels' Americas Research, total operating revenue, driven by a 0.2 percent rise in occupancy and a 2.5 percent growth in average daily rate (ADR), increased by 2.4 percent in 2016 for the average hotel in its survey sample. However, by limiting the growth in operating expenses to just 1.6 percent, managers at the Trends(r) properties were able to extract a 3.7 percent increase in gross operating profits (GOP) for the year."The competitive market conditions faced by U.S. hotels in 2016 have been well documented. With the results of the 2017 Trends(r) report, we now have an understanding of the impact that the modest revenue gains had on the bottom-line," said R. Mark Woodworth, senior managing director of CBRE Hotels' Americas Research. "Clearly, U.S. hotel operators saw the threat of stagnant or declining occupancy and slow ADR growth and reacted by controlling expenses. 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."Trends(r) in the Hotel Industry is the firm's annual survey of operating statements from thousands of hotels across the nation. The 2016 operating data collected for the 2017 survey was compiled in accordance with the 11th edition of the Uniform System of Accounts for the Lodging Industry. Controls and CutsThe nominal 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. Understanding that the typical hotel in the sample experienced an increase in occupancy, it was noteworthy that operated departmental expenses (with a high degree of variable costs) only grew by 1.7 percent during the year. Concurrently, undistributed expenses (with a high degree of fixed costs) increased by just 1.3 percent."With hourly compensation for hospitality industry employees increasing by more than 4.0 percent, it was somewhat surprising that total labor costs grew by just 2.8 percent for the year. This implies that managers controlled staffing levels and/or increased productivity," said John B. (Jack) Corgel, Ph.D., professor of real estate at the Cornell University School of Hotel Administration and senior advisor to CBRE Hotels' Americas Research. "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 comprise roughly half of the operating expenses. The other half of the operating expenses consists of 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 percent in 2016."Hotel operators benefited from low inflation, as well as a reduction in the costs for items such as food and utilities. However, as revenues continue to rise, so do the costs for related expenses like credit card commissions, management and franchise fees," Woodworth noted. "The one expense item that really stood out was the 6.8 percent increase in commission payments made to travel agents, OTAs and other intermediaries. This is consistent with what we are hearing from our clients."Location MattersThe growth in GOP during 2016 was 3.7 percent for the entire Trends(r) sample. However, when analyzing the data by regions across the country, CBRE Hotels' Americas Research observed some dramatic differences. GOP growth was strongest for hotels in the Mountain/Pacific (7.0 percent) and South Atlantic (6.1 percent) regions. Conversely, properties in the South Central region suffered a GOP decline of 0.4 percent."We constantly advise our clients to pay attention to their local markets. In 2016, there was great diversity in economic performance across the country. In Texas, there is a depressed energy industry, while technology continues to drive the economy in California. When looking at the 2017Trends(r) survey results by geography, the relationship between local economics and lodging performance becomes evident," said Corgel.Diversity in performance also was observed by property type. The resort hotels in the Trends(r) sample enjoyed the greatest GOP increase (6.0 percent), while limited-service profit growth was restricted to just 1.4 percent. "For the resort properties, it was mainly a revenue story. Compared to others in the sample, resort operators achieved the greatest gains in occupancy, ADR and other operated department revenue during 2016. However, limited-service managers, facing a higher degree of fixed and uncontrollable costs, struggled to curb increases in their expenses," Woodworth said.Future Focus on ExpensesIn the March 2017 edition of Hotel Horizons(r), CBRE Hotels' Americas Research is forecasting RevPAR growth rates ranging from 1.7 to 3.0 percent from 2017 through 2021. At these modest levels, management's ability to control costs will enable profit growth."During the next few years, owners and operators should spend just as much time thinking about expenses as they do RevPAR. 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," Woodworth concluded.To purchase a copy of the 2017 edition of Trends(r) in the Hotel Industry report, please visit https://pip.cbrehotels.comCBRE Hotels is a specialized advisory group within CBRE providing capital markets, consulting, investment sales, research and valuation services to companies in the hotel sector. CBRE Hotels is comprised of more than 385 dedicated hospitality professionals located in 60 offices across the globe.
CBRE Hotels - 19 April 2017
The definition of "select-service" within the lodging industry may vary from person to person, but there is no doubt that properties in this segment are the most popular among developers. Using the broadest definition of select-service, this category comprised an estimated 89 percent of the total hotel projects under construction according to the December 2016 U.S. Hotel Pipeline report from STR.As the name implies, select-service properties offer limited degrees of services and amenities compared to full-service hotels. While most select-service properties do not contain extensive meeting, recreational and retail facilities, there is diversity when it comes to the offering of food and beverage (F&B) service for sale. Within the select-service category, there are brands that offer retail food and beverage service, and others that do not.To gain a better understanding of the performance of select-service hotels, we analyzed a group of 233 properties that provided year-end operating statements for our firm's Trends(r) in the Hotel Industry survey each year from 2010 through 2015. One-third of the properties in the sample offer some degree of retail food and beverage service (e.g. Hilton Garden Inn, Courtyard by Marriott, Hyatt Place), while the remainder of the sample is true limited-service hotels (e.g. Hampton Inn, Fairfield Inn, Comfort Inn). For the purposes of this analysis, we limited our analysis to properties that operate in the upper-midscale and upscale chain-scale segments, and are affiliated with brands that are generally considered to be "select-service". Excluded from the analysis were extended-stay hotels and full-service suite hotels, as well as traditional full-service hotels, convention hotels and resorts.Operating EfficienciesFor hoteliers, a large part of the reason for the popularity of owning and operating select-service properties is the relative ease of operations. Without the extensive array of facilities, services, and amenities, select-service hotels have fewer departments to manage, and are more efficient to operate. In 2015, the properties in our select-service sample achieved a gross operating profit (GOP) margin of 44.2 percent of total operating revenue. This compares to a 37.5 percent average GOP margin for all properties in our Trends(r) survey. GOP is defined as income before deductions for management fees and non-operating income and expenses.Like all property types, labor is the largest expense item for operators to manage. However, labors costs are minimized at select-service hotels. This contributes to the efficiency and profitability of this segment. In 2015, the combined costs of salaries, wages, and benefits equaled 22.6 percent of total operating revenue, or $8,109 per available room (PAR). This compares to 31.6 percent, and $22,224 PAR for the overall Trends(r) sample.Select F&B For ProfitsIt is generally accepted that limited-service hotels (no retail food and beverage outlets) are more profitable than full-services hotels. Within the overall lodging industry, this is true. According to the 2016 Trends(r) in the Hotel Industry report, limited-service hotels in the U.S. achieved a 44.6 percent GOP margin in 2015, compared to 36.9 percent at full-service properties. However, within the select-service segment, we have seen a recent shift in conventional wisdom.In 2010, the select-service properties in our study sample that do not offer retail food and beverage service achieved a GOP margin of 42.9 percent. This was greater than the 41.9 percent GOP margin set by the select-service hotels with restaurants and lounges. Five years later, this trend reversed. In 2015, it was the select-service sample with food and beverage that achieved the greater GOP margin (45.6%) compared to the select-service hotels without food and beverage (42.9%). From 2010 to 2015, gross operating profits PAR at the select-service properties with F&B increased at a compound average annual rate (CAGR) of 7.5 percent, compared to 5.5 percent for the select-service hotels without F&B.When analyzing the data, greater efficiencies in the food beverage department of select-service hotels contributed to the enhanced profitability. From 2010 through 2015, food and beverage department profits at select-service hotels have increased at a healthy CAGR of 8.7 percent.Changes in the F&B offerings at select-service hotels appear to have contributed to the increase in department profitability. Most select-service hotels have limited the hours and extent of food and beverage service at their outlets. Select-service hotels have pioneered the grab-and-go, and lobby coffee-house styles of food and beverage service. While this has resulted in a slowdown in the pace of F&B revenue growth, is has also limited the increases in the cost of F&B operations. From 2010 through 2015, select-service F&B department profit margins have increased from 17.8 percent to 20.4 percent.Another factor contributing to the enhanced profitability of the select-service with food and beverage sample has been the ability to control labor costs. Labor costs measured on a per-occupied-room (POR) basis at the select-service with F&B sample increased at a CAGR of 2.6 percent from 2010 to 2015. This compares to 3.5 percent for the select-service without F&B sample. The enhanced efficiency in the use of labor at the select-service hotels that offer food and beverage can be partially explained by the service changes made to the restaurants and lounges.Development DecisionWhile select-service hotels are very efficient and profitable operations, the decision to develop a property requires additional information. In 2015 the gross operating profit PAR for our select-service sample was 40 percent less than the GOP for our overall Trends(r) survey sample because of lower average daily rates and lack of other revenue sources. After considering the cost of capital and desired level of return, developers need to determine if the 40 percent deficiency in profits can still cover the assumed lower cost of development. Then, once the decision has been made to enter the select-service segment, owners need to choose between select-service properties with, or without, food and beverage.
CBRE Hotels - 4 April 2017
CBRE's Mark Woodworth and Jack Corgel discuss our latest lodging industry forecasts. CBRE Hotels is a specialized advisory group within CBRE providing brokerage, valuation, consulting, research and capital markets services to companies in the hotel sector. CBRE Hotels is comprised of over 375 dedicated hospitality professionals located in 60 offices across the globe.
CBRE Hotels - 22 March 2017
Atlanta -- U.S. hotels enjoyed another year of life at the performance peak in 2016 and are forecast to continue to live the high life in 2017. According to the recently released March 2017 Hotel Horizons(r) forecast report from CBRE Hotels' Americas Research, rooms revenue (RevPAR) grew for a seventh consecutive year in 2016, and the prospects for RevPAR growth are projected to be solid for the foreseeable future. What is surprising, however, is the impetus for sustained revenue expansion comes from some unexpected sources."The hotel business is cyclical. The upper-priced properties led the U.S. lodging industry out of the recession and have continued to achieve occupancy levels in excess of 70 percent. However, recently it has been the lower-priced properties that have shown the greatest gains in RevPAR," said R. Mark Woodworth, senior managing director of CBRE Hotels' Americas Research. "In the past five years, RevPAR for U.S. hotels increased at compound annual rate (CAGR) of 5.7 percent. The only chain-scale close to achieving this pace of revenue growth was the economy segment whose average annual RevPAR increase was 5.6 percent during this period. That means independent and economy chain-affiliated properties have been the primary drivers of the industry's recent strong performance."Looking forward, this trend is expected to continue. From 2017 through 2021, CBRE Hotels' Americas Research is projecting that the U.S. lodging industry will achieve a RevPAR compound annual growth rate (CAGR) of 2.2 percent. During this period, the RevPAR CAGR is projected to be 2.8 percent for the economy chain-scale. "We recognize that economy properties still achieve the lowest levels of occupancy and ADR, but investors looking for a 'growth story' shouldn't overlook this segment of the industry while some of the other chain-scale categories begin to stall out," said Woodworth.SMALL M ARKETSIn addition to lower-priced hotels, small markets also are enjoying significant RevPAR increases. In 2016, RevPAR growth for the 60 markets covered by CBRE's Hotel Horizons(r) forecast reports averaged 2.8 percent. This is below the aggregate 3.6 percent RevPAR growth achieved by hotels located outside of the 60 markets. The gap in performance is expected to widen in 2017 when Horizons(r) universe is forecast to see RevPAR increase by 2.0 percent. Concurrently, the remaining markets are projected to achieve a 3.8 percent increase in RevPAR during the year."So much attention is being paid to the major urban and gateway markets," said John B. (Jack) Corgel, Ph.D., professor of real estate at the Cornell University School of Hotel Administration and senior advisor to CBRE Hotels' Americas Research. "Over three quarters of the new hotel rooms forecast by CBRE to enter the U.S. lodging industry in 2017 will be located in the 60 major markets we track, even though these markets represent just 48 percent of the overall national hotel inventory. The increased competition in major markets certainly helps explain why these markets have recently lagged in RevPAR growth and are expected to continue to suffer in the near term."NOT TOP OF MIND"When you read the hotel trade journals there is a growing sense of skepticism among industry analysts and attendees at the major industry conferences. I attribute this to the large sums of public company money that have been invested in upper-priced properties located in major markets," Corgel noted. "Economy and independent hotels, as well as the secondary markets, are left off the agenda, so they are they are not top-of-mind.""The fact is that U.S. hotels are achieving all-time record occupancy levels and near record profit margins. A lot of money is being made from hotel operations these days. While the prospects for growth in revenues and profits are moderating, opportunities still exist. Investors just need to investigate some of the historically overlooked chain-scale and geographical segments to find better returns," Woodworth concluded.Note: * Before deductions for management fees and non-operating inco me and expensesSource: CBRE Hotels' Americas Research, March 2017 - May 2017 Hotel Horizons(r) ForecastSource: CBRE Hotels' Americas Research, March 2017 - May 2017 Hotel Horizons(r) ForecastSource: CBRE Hotels' Americas Research, Trends(r) in the Hotel Industry Source: CBR E Hotels' Americas Research, STR To purchase copies of the March 2017 editions of Hotel Horizons(r) for the U.S. lodging industry and 60 major markets, please visit: https://pip.cbrehotels.com.
CBRE Hotels - 13 March 2017
Changes in rooms revenue per available room (RevPAR), and RevPAR penetration receive a lot of attention from hotel managers. This is because the monies hotels receive from renting guest rooms is the major source of revenue across all property types in the U.S. According to the 2016 edition of Trends in the Hotel Industry, rooms revenue averaged 68.1 percent of total operating revenue in 2015. This metric exceeds 97 percent at limited-service and extended-stay hotels. Alternatively, rooms revenue comprises only 51.8 percent of total revenue at resorts.Even more impressive than the contribution of rooms revenue to total revenue, is the influence of the rooms department on hotel profitability. On average, the profits generated by the rooms department made up 81.7 percent of total department profits in 2015. This ratio ranged from 68.2 percent at resorts to 99.1 percent at limited-service properties. In short, as the rooms department goes, so goes the hotel.To gain a better understanding of the profitability of hotel rooms departments, we examined the performance 1,809 properties that submitted data to our Trends survey each year from 2007 to 2015. This allows us to analyze changes in rooms department expenses and profits through the latest industry cycle.Labor IntensivePer the Uniform System of Accounts for the Lodging Industry, representative expenses assigned directly to the rooms department include items such as labor costs, the cost to launder linens, guest room supplies, reservation system expenses, travel agent commissions, and complimentary food and beverage.By far the greatest expense within the department is labor. Personnel within the rooms department consist of room attendants, laundry workers, front desk clerks, bellmen, reservationists, and concierges. In 2015, the combined cost of salaries, wages, and benefits for these positions equaled 61.3 percent of total rooms department expenses.As expected, convention, resort, and full-service hotels have the highest percentage of labor costs measured against department revenue. These properties offer the most extensive levels of services and amenities, and therefore have the greatest staffing levels. Conversely, extended-stay hotels achieve the lowest labor to revenue cost ratio because they only service guest rooms periodically and have lower volumes of check-ins and check-outs.Despite the extensive array of expenses and high dependency on labor, rooms departments are very profitable. On average, the properties in our study sample averaged a department profit margin of 74.5 percent in 2015. This ranged from 71.3 percent at convention hotels to 81.3 percent at the extended-stay properties.The Other ExpensesRevPAR for the study sample increased at a compound annual growth rate (CAGR) of 1.6 percent from 2007 to 2015. Unfortunately, total department expenses increased by a CAGR of 2.5 percent during the same period. Therefore, department profits grew at a CAGR of just 1.3 percent.While labor is the largest expense within the rooms department, over the past eight years it has been the other rooms department expenses that have subdued the ability of management to increase profits. During the past eight years labor costs measured on a per available room basis increased at a CAGR of 2.1 percent, but the combined cost of all other department expenses grew by 3.0 percent. This same pattern holds true when measuring these same items on a dollar per occupied room basis.Labor costs within the rooms department tend to be more variable compared to other departments. Management can vary the schedules of housekeeping, laundry, front desk and bell staff personnel with fluctuations in occupancy. Going forward, however, controlling labor costs will be more challenging as occupancy levels remain near all-time record levels, and salary and wage rates increase.The rise in the other department expenses may be partially explained by increases in brand standards. Over the years, we have heard from our clients that the hotel brands have raised their standards for items like bedding and linens, in-room gratis coffee and water, and complimentary breakfasts. Further, the commissions paid to third parties have increased given the proliferation of online travel agencies.With expenses growing at a greater pace than revenues, rooms department profit margins for the subject sample in 2015 (74.5%) were below 2007 levels (76.3%). The only property type able to improve their profit margin during this period was all-suite hotels.Challenges in the FutureCBRE Hotels' Americas Research's December 2016 edition of Hotel Horizons is forecasting RevPAR gains of less than three percent from 2017 through 2019. Facing modest growth in rooms revenue, hotel managers will be challenged to maintain growth in both rooms department profit levels, and profit margins. Given the link to overall hotel profitability, hotel owners and operators need to pay attention to rooms department expenses, not just RevPAR.
Majority of Real Estate Investors in The Americas Expected to be Net Buyers in 2017, CBRE Survey Finds
CBRE Hotels - 10 March 2017
Los Angeles Retains Position as Number One TargetIndustrial is Most Attractive Property Type for InvestmentMore than Half of Institutional Investors Plan to Deploy $1 Billion or More in 2017The prospect of increased U.S. economic growth combined with less regulation, means that investor sentiment for commercial real estate investment is marginally more positive than last year, despite the potential for rising interest rates, according to the CBRE Americas Investor Intentions Survey 2017.The 2017 survey results reveal that investors will remain actively engaged in real estate investment this year, with the majority (67%) intending to be net buyers (more acquisitions than dispositions). The percentage of net buyers has increased since 2015 (60%) and 2016 (65%). The vast majority of these investors (83%) intend to maintain or increase their purchasing activity in 2017.Slow global economic growth that could undermine occupier demand (22%) was identified as the greatest risk factor for real estate investors, just ahead of rising interest rates (21%). Concern about property being overpriced and "a bubble waiting to burst" (16%) is a distant third among the list of potential threats. Investors are relatively unconcerned about the potential effects of government policy measures."While investors expect to largely maintain last year's investment activity levels, they also intend to retreat on the risk curve, becoming more conservative in strategy and risk appetite. This is counterbalanced by the search for yield," said Brian McAuliffe, president, Institutional Properties, Capital Markets, CBRE."Echoing concerns that arose at the beginning of 2015, investors perceive the global economy and rising interest rates as the greatest threats to property markets; they also continue to have concerns about asset pricing. If the anticipated level of inflow into commercial real estate materializes, this should to some extent counteract any pricing pressure resulting from a rise in interest rates," Mr. McAuliffe added.Investors continue to be strongly interested in U.S. gateway markets. Los Angeles maintained its position as the most preferred metro for investment in 2017, ahead of Dallas/Fort Worth and New York City. Washington, D.C. moved up the ranks from eighth to the fourth most preferred metro for investment in 2017. Atlanta, Seattle and Houston are also viewed as attractive markets for investment. The majority of investors are focused on real estate in the Americas and do not intend to make asset purchases in other regions of the world.Half of the investors surveyed (51%) are primarily searching for yield, relative to both government bonds (30%) and other asset classes (21%). This trend is even more pronounced among institutional investors, with 53% searching for yield.Among the five different asset types by strategy--prime or core, good secondary, value-add, opportunistic, and distressed--value-add remains the preferred strategy (39%) and at similar levels to 2016. Investors' appetite for good secondary (non-core) assets increased significantly in 2017, ranking second. This displaced core, which was ranked second-highest in 2016. The relatively diminished appetite for core product is attributed to a combination of low cap rates (which are not expected to get lower), weakening property fundamentals, and the search for higher yielding assets.Reversing 2016 trends, the industrial sector (38%) is viewed as the most attractive asset class for investment in 2017, replacing multifamily (28%), with office (18%) in third position. Reflecting the headwinds in the retail sector from e-commerce competition, only 8% of investors cited retail as an attractive option in 2017, significantly lower than the 17% in 2016. Among "alternatives", retirement housing was the only sector with an increase in interest, albeit small at 2%. Conversely, there were sharp drops in interest in real estate debt product and the leisure/entertainment sector."U.S. industrial has emerged as a preferred asset class for institutional investors, both domestic and foreign. Global investors are targeting the sector for acquisitions and development, especially opportunities with scale. Investors realize that the fundamentals are robust with record-setting metrics for net absorption and rental rate growth, while new economic drivers such as e-commerce and the 'Last Mile' are creating even more growth in the sector," said Jack Fraker, vice chairman and managing director, Industrial Properties, Capital Markets, CBRE.Institutional investors (comprising sovereign wealth funds, insurance and pension funds) intend to be strong net buyers in 2017. More than half (54%) of all institutions plan to deploy more than $1 billion of capital in the Americas this year. Marking a departure from the wider pool of survey respondents, institutions are still primarily focused on core assets, closely followed by value-add. CBRE Research estimates that SWFs in particular are under-allocated to commercial real estate (with top 20 SWF's allocating an estimated 3% of total assets to real estate), which accounts for expected higher levels of capital deployment.To download a copy of CBRE's Americas Investor Intentions Survey 2017 or to speak with a CBRE expert, please contact Aaron Richardson (212.984.7126 or firstname.lastname@example.org) or Ayana Miller (212.984.6506 or email@example.com).Survey methodology and composition of respondentsThe 22-question Americas Investor Intentions Survey 2017 was conducted among CBRE clients between January 6 and February 6, 2017. The Americas survey is part of the larger global survey, for which nearly 2,000 responses were received.Nearly 1,000 survey respondents indicated that the Americas is the global region which they are most responsible for in their current position. This report covers the responses of these investors.The Americas survey respondents represent a wide cross-section of real estate companies and investor types. The largest category is fund or asset managers at 28%, followed by private property companies at 14% of the total. Private equity firms, developers and REITs were also well-represented by the survey.The survey respondents invest in a wide variety of investment modes. Most investors use multiple types of investment vehicles (and chose multiple types in the survey).
CBRE Hotels - 28 February 2017
U.S. hotels enjoyed another year of life at the performance peak in 2016 and are forecast to continue to live the high life in 2017. According to the recently released March 2017 Hotel Horizons(r)forecast report from CBRE Hotels' Americas Research, rooms revenue (RevPAR) grew for a seventh consecutive year in 2016, and the prospects for RevPAR growth are projected to be solid for the foreseeable future. What is surprising, however, is the impetus for sustained revenue expansion comes from some unexpected sources."The hotel business is cyclical. The upper-priced properties led the U.S. lodging industry out of the recession and have continued to achieve occupancy levels in excess of 70 percent. However, recently it has been the lower-priced properties that have shown the greatest gains in RevPAR," said R. Mark Woodworth, senior managing director of CBRE Hotels' Americas Research. "In the past five years, RevPAR for U.S. hotels increased at compound annual rate (CAGR) of 5.7 percent. The only chain-scale close to achieving this pace of revenue growth was the economy segment whose average annual RevPAR increase was 5.6 percent during this period. That means independent and economy chain-affiliated properties have been the primary drivers of the industry's recent strong performance."Looking forward, this trend is expected to continue. From 2017 through 2021, CBRE Hotels' Americas Research is projecting that the U.S. lodging industry will achieve a RevPAR compound annual growth rate (CAGR) of 2.2 percent. During this period, the RevPAR CAGR is projected to be 2.8 percent for the economy chain-scale. "We recognize that economy properties still achieve the lowest levels of occupancy and ADR, but investors looking for a 'growth story' shouldn't overlook this segment of the industry while some of the other chain-scale categories begin to stall out," said Woodworth.Small MarketsIn addition to lower-priced hotels, small markets also are enjoying significant RevPAR increases. In 2016, RevPAR growth for the 60 markets covered by CBRE's Hotel Horizons(r) forecast reports averaged 2.8 percent. This is below the aggregate 3.6 percent RevPAR growth achieved by hotels located outside of the 60 markets. The gap in performance is expected to widen in 2017 when Horizons(r) universe is forecast to see RevPAR increase by 2.0 percent. Concurrently, the remaining markets are projected to achieve a 3.8 percent increase in RevPAR during the year."So much attention is being paid to the major urban and gateway markets," said John B. (Jack) Corgel, Ph.D., professor of real estate at the Cornell University School of Hotel Administration and senior advisor to CBRE Hotels' Americas Research. "Over three quarters of the new hotel rooms forecast by CBRE to enter the U.S. lodging industry in 2017 will be located in the 60 major markets we track, even though these markets represent just 48 percent of the overall national hotel inventory. The increased competition in major markets certainly helps explain why these markets have recently lagged in RevPAR growth and are expected to continue to suffer in the near term."Not Top of Mind"When you read the hotel trade journals there is a growing sense of skepticism among industry analysts and attendees at the major industry conferences. I attribute this to the large sums of public company money that have been invested in upper-priced properties located in major markets," Corgel noted. "Economy and independent hotels, as well as the secondary markets, are left off the agenda, so they are they are not top-of-mind.""The fact is that U.S. hotels are achieving all-time record occupancy levels and near record profit margins. A lot of money is being made from hotel operations these days. While the prospects for growth in revenues and profits are moderating, opportunities still exist. Investors just need to investigate some of the historically overlooked chain-scale and geographical segments to find better returns," Woodworth concluded.To purchase copies of the March 2017 editions of Hotel Horizons(r)for the U.S. lodging industry and 60 major markets, please visit: https://pip.cbrehotels.comCBRE Hotels is a specialized advisory group within CBRE providing capital markets, consulting, investment sales, research and valuation services to companies in the hotel sector. CBRE Hotels is comprised of more than 385 dedicated hospitality professionals located in 60 offices across the globe.
CBRE Hotels - 24 February 2017
The national unemployment rate fell to 4.7% in Q4--the lowest level since the Great Recession--and non-farm employment increased by 165,000 jobs per month, according to the Bureau of Labor Statistics (BLS).Lodging demand grew 2.3% year-over-year in Q4, compared with 1.6% in Q3. The solid demand gains pushed up occupancy by a half percentage point to 60.7% in Q4--the highest fourth-quarter occupancy level since STR began recording this metric in 1987.The year-over-year number of available rooms nationally increased slightly by 1.7%. Rooms under construction grew 2.2% from the Q3 total to about 187,000 units, with another 150,000 rooms expected to open within 12 months.Despite record occupancy, overall ADR growth was somewhat muted in Q4 at 2.6%. Economy hotels had the largest ADR growth at 3.2% in Q4 compared with a year earlier.Download the full report.
CBRE Hotels - 17 February 2017
The offering of complimentary services and amenities by U.S. hotels is on the rise. From 2007 to 2015, hotel expenditures on complimentary food, beverages, in-room media, services, and gifts just within the rooms department increased at a compound annual growth rate (CAGR) of 3.6 percent. For comparison purposes, all hotel operating expenses rose at a 1.1 percent CAGR during the same time period.Much of the proliferation can be attributed to brand standards which mandate the offering of complimentary food, beverages, newspapers, internet, and other services and amenities. Most frequent travelers, especially those staying at properties within the lower-priced chain scales, have come to expect at least a free breakfast. At the upper-priced properties, an increasing number of frequent guest programs now provide complimentary internet access.In response to the increased incidence of complimentary services and amenities, the 11th edition of the Uniform System of Accounts for the Lodging Industry (USALI) expanded the number of expense categories to capture this rising cost. Within the rooms department three discrete expense categories now record the costs associated with the offering of complimentary food and beverage, in-room media and entertainment, and services and gifts. In addition, a complimentary services and gifts cost category was added to almost all operated and undistributed departments.To analyze recent trends in complimentary services and amenities, we examined the combined expenditures for complimentary services and amenities within the rooms department. This includes all three complimentary expense categories:Complimentary Food and Beverage: Gratis breakfasts, cocktail receptions, concierge floor, coffee in the lobby.Complimentary In-Room Media and Entertainment: Gratis cable TV, music, games, satellite video.Complimentary Services and Gifts: Promotional gifts to guests and vendors such as newspapers, VIP gifts, guest room flowers and fruit baskets for a frequent guest.The data comes from the operating statements of 1,077 properties that participated in CBRE Hotels' Americas Research's annual Trends(r) in the Hotel Industry survey each year during the period 2007 through 2015. Please note that the analysis does not include the amount of money hotels spend to offer complimentary WiFi, guest supplies (toiletries, writing paper, shoe mitts, etc...), or services and gifts within other departments.Resorts Lead The WayAs expected limited-service, extended-stay and all-suite properties spend relatively high dollar amounts to provide complimentary services and amenities to their guests. Most properties in these segments are chain-affiliated, and brand standards require the offering of a complimentary breakfast. Some extended-stay and all-suite brands even require a gratis manager's cocktail reception during the early evening.In 2015, all-suite hotels led these three property types and spent $2.36 per occupied room on complimentary services and amenities. This compares to $2.24 at extended-stay hotels and $2.12 at limited-service properties.Somewhat surprising is that resort hotels lead all hotel categories in complimentary rooms department expenditures. In 2015, resorts spent $2.70 per occupied room. It is not common for these property types to routinely offer complimentary breakfasts and receptions, so it can be assumed that these hotels invest in gratis concierge lounges, welcome beverages, newspapers, and gifts.Since complimentary food and beverage is not frequently found at convention ($1.41 POR) and full-service ($1.68 POR) hotels, these properties recorded the least amount spent on complimentary services and amenities. It can be assumed the frequent guests at these hotels are the primary recipients of any gratis expenditures.Complimentary RoomsAnother service that hotels provide to demonstrate goodwill and attract guests is the offering of complimentary stays. Per the 11th edition of the USALI, a complimentary room is defined as, "Free rooms provided to any guest, often for marketing purposes, but not related to an existing contractual relationship. Not classified as complimentary rooms are rooms provided due to a trade-out arrangement, rooms provided in connection with a promotion (e.g., stay two nights, get one free), or rooms provided as part of a group contract (e.g., book 50 rooms, get one free)."Unlike the offering of complimentary services and amenities, the granting of complimentary stays is on a downward trajectory. Evidently, as occupancy levels reach all-time highs, managers are less likely to offer free rooms to potential customers and friends.From 2007 to 2015, the number of complimentary rooms granted at the subject properties has declined by 14.2 percent. The number of complimentary rooms in the subject sample peaked in 2008, the first year of the great recession. As a percent of total occupied rooms, complimentary rooms averaged 1.0 percent in 2015. This ratio hit its high in 2009 at 1.33 percent, primarily due to that year's low occupancy level.Per the USALI, complimentary rooms are not included in the calculations of occupancy and average daily rate (ADR). However, if they were, in 2015 the occupancy level for the sample would have increased from 74.8 percent to 75.5 percent. Concurrently, the ADR would have dropped from $184.09 to $182.33.Guests Expect FreebiesAs room rates have climbed, guests expectations for complimentary services and amenities have increased. Topping most surveys of guest satisfaction are the offering of complimentary internet access and breakfast. As revenue growth tappers off at the peak of the lodging cycle, hotel managers are now looking at cost containment to improve profitability. This will put pressure on the continuation of offering complimentary services and amenities.
CBRE Hotels - 10 January 2017
While 2016 was a slow deal year for major transactions, there was significant activity involving regional and leisure assets.Looking ahead, new supply will be a concern in many major markets in 2017.In Melbourne, it will be hard to drive room rate growth given continued new supply. Strong occupancies are still being achieved but rate growth will be moderate.In Sydney, the average daily rate will continue to be strong with limited new supply and the new Sydney Exhibition Centre coming on line. This will make Sydney the number one performing hotel market for the next three to five years.In Brisbane, rates and occupancy levels will remain under pressure given the level of new supply and the lack of major new demand generators. However, with head works starting and road closures now in place for the start of works on the Queens Wharf Redevelopment, the announcement of the $20b Adani Coal Mine and recovering coal and iron ore pricing, we expect that the Queensland hotel market will begin to recover from 2018 onwards.Counter cyclical opportunities will arise for astute investors in areas such as Brisbane and Perth. However, we expect that most deals done in these markets will be off market deals rather than on market.Cairns, the Gold Coast and the Whitsunday Island regions will continue to experience a strong recovery in room rates and occupancies as inbound tourism arrivals numbers continue to grow with the lower Australian dollar.However, until the mining industry fully recovers there may be distressed sales occurring in some areas of Australia as valuations of properties are ordered by the banks. Areas that will be affected will be the sub regional markets like Mackay, Townsville and Gladstone and regional areas of WA in towns that were once thriving due to the mining boom. If one bank moves on owners in these regions other banks will be sure to follow suit.
CBRE Hotels - 5 January 2017
Washington, DC -- The outlook for the U.S. lodging industry, particularly historic hotels, continues to be extremely strong, according to CBRE Hotels' Americas Research (CBRE).For the third consecutive year, CBRE Hotels' Americas Research presented a Historic Hotels of America - CBRE five-year forecast at the Historic Hotels of America annual conference. CBRE relies on historical hotel performance data from STR, and economic forecasts from CBRE Econometric Advisors, to prepare its lodging forecasts.Key points presented by Mark Woodworth, Senior Managing Director at CBRE, to more than 200 owners, asset managers, general managers, and sales and marketing leaders at the Historic Hotels of America annual conference at The Royal Hawaiian, A Luxury Collection Resort(1927) in early November, 2016 include:'Per STR, through the first three quarters of 2016, the aggregate RevPAR for historic hotels that are members of Historic Hotels of America placed between the national averages for all upper-upscale and all luxury hotels in the U.S.Over the next five years, RevPAR for historic hotels is expected to grow at a compound average annual rate of 2.7 percent, which is greater than the RevPAR forecasts for the nation's upper upscale hotels at 2.0 percent and 1.7 percent for luxury hotels. Most of the RevPAR growth is expected to stem from increases in ADR.Annual occupancy levels for hotels that are members of Historic Hotels of America remains 8 to 10 percentage points above the national average occupancy level through 2020.Based on a set of information pulled from CBRE's database of hotel operating statements, historic hotels (including those that are not members of Historic Hotels of America) had an average ADR of $256.11, higher by more than 11.6 percent than the $229.59 ADR for contemporary hotels. (See chart below) Historic hotel revenue has recovered fully from the 2007 down-turn while comparable contemporary hotels are still lagging in revenue recovery."The data strongly supports the idea that many consumers favor and will pay more for the unique hotel experience historic properties can offer," noted Woodworth."Historic Hotels of America helps the consumer differentiate the authentic historic hotel from other older hotels," said Lawrence Horwitz, Executive Director, Historic Hotels of America and Historic Hotels Worldwide "For the third year in a row, historic hotels inducted into and participating in Historic Hotels of America realize a competitive advantage as well as a substantial premium with their rates, occupancy and RevPAR compared to other hotels" CBRE Hotels is a specialized advisory group within CBRE providing capital markets, consulting, investment sales, and research and valuation services to companies in the hotel sector. CBRE Hotels is comprised of more than 385 dedicated hospitality professionals located in 60 offices across the globe.
CBRE Hotels - 20 December 2016
The 2017 outlook for U.S. hotels offers mixed blessings, with near record occupancy levels projected while average daily room rates (ADR) are expected to continue leveling off. According to the recently released December 2016 Hotel Horizons(r) forecast report, CBRE Hotels' Americas Research is projecting that the U.S. lodging industry will achieve annual occupancy rates of 65.3 percent in 2016 and 65.0 percent in 2017. Both of these marks are just shy of the 65.4 percent all-time record occupancy level posted in 2015. "Conventional wisdom says that at such high occupancy levels, hoteliers should have the leverage to implement strong price increases. However, like for much of 2016, you need to throw conventional wisdom out the window," said R. Mark Woodworth, senior managing director of CBRE Hotels' Americas Research. Despite the lofty occupancy levels, CBRE is forecasting a national ADR increase of 3.3 percent in 2017. While this represents a real ADR change of 1.7 percent, the pace of ADR growth has been falling since 2014 and is expected to continue to weaken through 2019. "Of course, movements in ADR do vary by location and chain-scale. The northern California markets of Sacramento and Oakland, along with Washington, D.C. and Tampa, are projected to lead the nation and enjoy ADR gains in excess of six percent during 2017. Further, lower-priced independent properties, which have lagged in their recovery, are starting to see some meaningful increases in room rate," Woodworth added. CBRE attributes the overall sluggishness in ADR growth to a combination of factors, some of which are new to the U.S. lodging industry:In an effort to draw business from third-party intermediaries, the major brands are aggressively promoting consumers to book direct on the chain's website with guaranteed "best available rates"Increased competition from the sharing economyWeekend leisure travelers now comprise a larger portion of total lodging demand - these guests tend to be more price-sensitive"Complicating matters in 2016 was the elevated level of economic and political uncertainty felt by the business community and consumers. Without knowing the outcome of the election, the direction of the Fed with regards to interest rates and the growing strength of the dollar, we sensed that companies and individuals held back on their commitments to spend more on meetings and travel," Woodworth observed. REASONS FOR OPTIMISMWhile the prospect for raising room rates may be disappointing for hotel owners and operators, the outlook for lodging demand growth is positive. "If you look at the recent economic indicators, you see increases in retail sales, auto sales, building materials and health and beauty products," said John B. (Jack) Corgel, Ph.D., professor of real estate at the Cornell University School of Hotel Administration and senior advisor to CBRE Hotels' Americas Research. "In short, people are spending on themselves, and that bodes well for travel." "We always remind clients that the performance of a hotel is closely tied to the health of the local economy. I see a great deal of public and private developments occurring around the country, and even more might take place if spending for infrastructure projects is approved by Congress. Hotel managers should identify areas in their communities where this development activity is occurring, and they will find new sources of demand," Corgel advised. COST CHALLENGESAs the economy improves and unemployment levels drop, hotel managers will continue to struggle to control their largest operating expense - labor costs. "In recent years, hotel managers have had to deal with rising salaries, wages and benefits, as well as increased staffing levels needed to serve the record levels of occupancy-- a trend we do not see dissipating in the near future," Woodworth noted. "Further, inflation, while still relatively low, is most likely on an upward trajectory. Eventually this will impact the other goods and services purchased by hotels." "This is where the inability to raise prices begins to hurt hoteliers. Management is unable to match the rising cost of operations with commensurate increases in room rates. This puts a significant strain on the ability to continue to achieve the levels of profit growth observed the past four or five years," Corgel added. FLAT - THE NEW NORMSlight declines in occupancy, combined with minimal real gains in ADR, is the pattern CBRE foresees through 2020. "Lodging is a cyclical business, and we continue to see U.S. hotels sit on top of the peak of the cycle after recovering from the Great Recession. We are encouraged by the positive outlook for lodging demand and resulting high levels of occupancy. While flat performance sounds disappointing, the strong underpinnings supporting continued growth in travel will prevent an outright fall from the peak," Woodworth concluded.To purchase copies of the December 2016 editions of Hotel Horizons(r) for the U.S. lodging industry and 60 major markets, please visit: pip.cbrehotels.com.CBRE Hotels is a specialized advisory group within CBRE providing capital markets, consulting, investment sales, research and valuation services to companies in the hotel sector. CBRE Hotels is comprised of more than 385 dedicated hospitality professionals located in 60 offices across the globe.
CBRE Hotels - 19 December 2016
The Federal Funds rate lies on the front end of the yield curve. Changes in this rate resulting from direct actions by the Federal Reserve affect changes in other short-term interest rates by similar magnitudes. Rates further out on the curve however are less responsive to changes in the Federal Funds rate, a situation Chairman Alan Greenspan who was once frustrated by this unresponsiveness described as an 'interest rate conundrum'. Other monetary policy methods can be introduced to influence rates along the longer segment of the yield curve. In the absence of these policy actions, long rates will fluctuate with trading based on expectations for future economic growth and inflation.With this backdrop, hotel market participants should not count on capitalization and interest rates moving in concert with changes in the Federal Funds rate. Instead, there should be recognition that policy actions targeting the Federal Funds rate happen because the Federal Reserve believes the economy is strengthening; thus long rates will systematically follow a resetting the Federal Funds rate on their own schedule. The path from a reset Federal Funds rate to a reset of Treasury long rates to a reset of hotel market rates is complicated. Statistical analyses linking changes in Treasury long rates to important property market rates need to hold other factors constant that influence property market rates. An analysis was recently completed that correlates hotel capitalization rates with 10-year Treasury rates.1 A brief summary of the findings is provided. Holding other important factors constant (i.e., risk premium, property income growth, and credit availability), the model estimated here indicates that a 100 basis point positive change in the 10-year Treasury rate has on average produced a 28 basis points uptick in hotel capitalization rates. With hotel capitalization rates currently in a range of 7.0 to 8.5 percent and an expected slow pace of interest rate changes the modelled outcome suggests that hotel capitalization rates will remain fairly stable for the foreseeable future. For CBRE's analysis on the Federal Reserve's interest rate increase, click HERE.1. To download and read Jack Corgel's full study, "The Effect of a Rise in Interest Rates on Hotel Capitalization Rates", click HERE.
CBRE Hotels - 15 December 2016
Historically hotels have offered retail operations primarily for guest convenience and satisfaction. In general, the revenue generated by hotel retail outlets represents only a small part of total hotel revenue. Of the properties in the Trends(r) in the Hotel Industry database of CBRE Hotels' Americas Research that reported retail revenues and expenses, retail sales made up just 0.9 percent of total hotel revenue in 2015. Retail operations vary greatly depending on the type of hotel. The retail department at resorts often includes clothing stores, gift shops, and newsstands full of custom-branded items with the hotel's logo. On the other end of the spectrum, limited-service properties frequently operate a small kiosk located next to the front desk that sells items mainly for the guest's convenience, such as toiletries, snacks, and soft drinks.To examine the financial impact of retail operations on U.S. hotels, we analyzed the revenues, expenses, and profits provided by 467 properties in the Trends(r) in the Hotel Industry that reported retail sales data each year from 2010 to 2015. All of the properties analyzed managed their own retail operations. Properties that leased their retail operations were excluded from the analysis.Revenue GrowthFrom 2010 to 2015, retail sales revenue for the properties in our sample increased at a compound annual growth rate (CAGR) of 4.1 percent. This is less than the growth in total hotel revenue (6.1%) during the same period, but greater than the average of all Other-Operated Departments (3.7%).Among the various property types, retail revenues grew the most at full-service hotels, and the least at resort properties. As full-service hotels adjust their food and beverage offerings, self-service mini-marts with prepared foods, microwable items, and alcoholic beverages are popping up in hotel lobbies and replacing three-meal-a-day, all-purpose restaurants, mini-bars, and room service. The mini-mart revenue has not fully replaced the revenue lost within the Food and Beverage Department, but it does meet an increasing consumer preference.Retail revenue growth has lagged at resort hotels, but they still achieve the highest levels of retail revenue. In 2015, resort hotels achieved annual retail revenues equal to $1,535 per-available-room (PAR) basis and $6.01 per-occupied-room (POR). The extensive retail offerings at resort hotels have remained fairly consistent, thus limiting sales growth compared to the other, evolving property types.Convention hotels, with large public spaces and greater guest counts, also achieve above average retail sales figures. In 2015, convention hotels enjoyed retail sales of $892 PAR and $3.17 POR.Retail sales volume is lowest at limited-service ($1.03 POR) and extended-stay ($0.76 POR) hotels. These property types were the forerunners of the mini-marts that the full-service hotels are now emulating. However, since limited-service and extended-stay properties typically offer one or two complimentary meals, the opportunity to sell more extesntive (and expensive) food items is limited.Profit GrowthGrowth in retails sales may have lagged overall hotel sales, but the story for retail department profits is very positive. From 2010 to 2015, the departmental profits for self-operated retail outlets increased by a CAGR of 7.6 percent. Retail department profits increased the most at full-service (10.2%) and extended-stay (8.8%) hotels.The healthy growth rates for profits can be partially attributed to the changing nature of the retail offerings. The mini-marts and kiosks previously mentioned require very little, if any, staffing. Most are manned by front desk personnel. In 2015, total labor costs equaled just 17.0 percent of departmental revenue on average for the entire sample, which contributed to the 27.0 percent profit margin achieved during the year. This is greater than the 22.9 percent profit margin recorded in 2010, thus emblematic of the enhancements to efficiency.At 50 percent of department revenue, the cost of goods sold is the greatest expense for hotel retail outlets. Per the rules of the Uniform System of Accounts for the Lodging Industry, departmental profits for all operated departments are calculated before deductions for undistributed expenses such as administration, technology, marketing, maintienance, and utilities.AdaptingHotel owners and operators continually alter their operations to meet the changing requirements of their guests. Stimulated in part by changing food and beverage facilities, as well as the growing desire for quicker and simplified retail outlets, properties have expanded their offerings of kiosks and mini-marts. This transformation has occurred in both full- and limited-service hotels. These new retail operations have proven to be well received by guests, and highly efficient and profitable.
CBRE Hotels - 14 December 2016
New York -- In 2015, hotel spa department revenue grew at a faster pace compared to other sources of hotel revenue. According to the recently released 2016 edition of Trends(r) in the Hotel Spa Industry, U.S. hotel spa departments were able to increase their revenue by 5.6 percent from 2014 to 2015. This compares favorably to a 3.3 percent rise in rooms revenue for the properties in the survey sample, and a 5.5 percent increase in total hotel revenue. This is the first time since the 2007 edition of the publication that spa revenue growth surpassed rooms revenue growth."CBRE Hotels' Americas Research is projecting modest gains in rooms revenue for the next few years as the U.S. lodging industry operates at the top of the business cycle," said Mark VanStekelenburg, managing director of the CBRE Hotels practice in New York City. "Therefore, hotel operators will need to look at other operated departments, like the spa, in order to accelerate the growth of total hotel revenue."Health and wellness is becoming an increasingly important component of everyday life. Though historically considered as an exclusively high-end hotel amenity, the integration of health and travel is now expected, at almost all hotels," VanStekelenburg added.In 2015, spa revenue grew more robustly than total hotel revenue at both urban and resort hotels, as well as hotels with more than $1 million in spa revenue. Spa operations with less than $1million in sales were the only properties where spa revenue growth lagged behind the increase in total hotel revenues.CBRE Hotels has surveyed the profitability of U.S. hotel spa performance for ten years. The annual review compiles revenue and expense items within spas operated by U.S. hotels. Not included in the survey are hotel spa operations that are leased to an outside party, day spas or destination spa properties. Strong Profit GrowthWhile hotel spa revenue is showing relatively strong growth, hotel spa department profits are increasing at an even greater pace. In 2015, hotel spa department managers were able to convert the 5.6 percent increase in revenues into a very strong 17.7 percent boost in department profits. In accordance with the Uniform System of Accounts for the Lodging Industry, department profits are calculated before the deduction of undistributed and fixed operating expenses.Spa managers were able to achieve such strong gains in profits because they controlled their expenses. From 2014 to 2015, the combination of cost of goods sold, labor costs and other operating expense increased by just 2.1 percent."Labor costs comprise approximately three quarters of operating expenses for a hotel spa. Given the surge in hotel labor costs that we have seen in recent years, spa managers should be commended for achieving such strong flow-through within their departments," VanStekelenburg noted. "In fact, it was a reduction in other operating expenses that offset the 5.8 percent increase in labor costs and allowed hotel spa departments to achieve the strong growth in profits."Because of scheduling challenges, spa department managers always have relied heavily on contracted employees. Now, in an effort to control labor expenses, we are starting to see other department managers increase their use of contract and leased employees to stem this rising cost within their departments," VanStekelenburg observed.A Bright FutureRecent economic reports have indicated increases in retail sales, auto sales, building materials and health and beauty products. "This is an indication that people are spending on themselves and bodes well for travel. Additional research shows that travelers are mindful of their well-being when choosing their lodging. Hotels have an opportunity to take advantage of this trend not just by promoting their spas, but by offering other health and wellness amenities and services throughout the hotel," VanStekelenburg concluded.To purchase a copy of the 2016 edition of Trends(r) in the Hotel Spa Industry, please visit: https://pip.cbrehotels.com
CBRE Hotels - 30 November 2016
Atlanta -- The 2017 outlook for U.S. hotels offers mixed blessings, with near record occupancy levels projected while average daily room rates (ADR) are expected to continue leveling off. According to the recently released December 2016 Hotel Horizons(r) forecast report, CBRE Hotels' Americas Research is projecting that the U.S. lodging industry will achieve an annual occupancy rate of 65.3 percent in 2017, just shy of the 65.4 percent all-time record occupancy level expected for 2016. "Conventional wisdom says that at such high occupancy levels, hoteliers should have the leverage to implement strong price increases. However, like for much of 2016, you need to throw conventional wisdom out the window," said R. Mark Woodworth, senior managing director of CBRE Hotels' Americas Research. Despite the lofty occupancy levels, CBRE is forecasting a national ADR increase of 3.3 percent in 2017. While this represents a real ADR change of 1.7 percent, the pace of ADR growth has been falling since 2014 and is expected to continue to weaken through 2019. "Of course, movements in ADR do vary by location and chain-scale. The northern California markets of Sacramento and Oakland, along with Washington, D.C. and Tampa, are projected to lead the nation and enjoy ADR gains in excess of six percent during 2017. Further, lower-priced independent properties, which have lagged in their recovery, are starting to see some meaningful increases in room rate," Woodworth added. CBRE attributes the overall sluggishness in ADR growth to a combination of factors, some of which are new to the U.S. lodging industry:In an effort to draw business from third-party intermediaries, the major brands are aggressively promoting consumers to book direct on the chain's website with guaranteed "best available rates"Increased competition from the sharing economyWeekend leisure travelers now comprise a larger portion of total lodging demand - these guests tend to be more price-sensitive"Complicating matters in 2016 was the elevated level of economic and political uncertainty felt by the business community and consumers. Without knowing the outcome of the election, the direction of the Fed with regards to interest rates and the growing strength of the dollar, we sensed that companies and individuals held back on their commitments to spend more on meetings and travel," Woodworth observed. Reasons for Optimism While the prospect for raising room rates may be disappointing for hotel owners and operators, the outlook for lodging demand growth is positive. "If you look at the recent economic indicators, you see increases in retail sales, auto sales, building materials and health and beauty products," said John B. (Jack) Corgel, Ph.D., professor of real estate at the Cornell University School of Hotel Administration and senior advisor to CBRE Hotels' Americas Research. "In short, people are spending on themselves, and that bodes well for travel." "We always remind clients that the performance of a hotel is closely tied to the health of the local economy. I see a great deal of public and private developments occurring around the country, and even more might take place if spending for infrastructure projects is approved by Congress. Hotel managers should identify areas in their communities where this development activity is occurring, and they will find new sources of demand," Corgel advised. Cost Challenges As the economy improves and unemployment levels drop, hotel managers will continue to struggle to control their largest operating expense - labor costs. "In recent years, hotel managers have had to deal with rising salaries, wages and benefits, as well as increased staffing levels needed to serve the record levels of occupancy-- a trend we do not see dissipating in the near future," Woodworth noted. "Further, inflation, while still relatively low, is most likely on an upward trajectory. Eventually this will impact the other goods and services purchased by hotels." "This is where the inability to raise prices begins to hurt hoteliers. Management is unable to match the rising cost of operations with commensurate increases in room rates. This puts a significant strain on the ability to continue to achieve the levels of profit growth observed the past four or five years," Corgel added. Flat - The New Norm Slight declines in occupancy, combined with minimal real gains in ADR, is the pattern CBRE foresees through 2020. "Lodging is a cyclical business, and we continue to see U.S. hotels sit on top of the peak of the cycle after recovering from the Great Recession. We are encouraged by the positive outlook for lodging demand and resulting high levels of occupancy. While flat performance sounds disappointing, the strong underpinnings supporting continued growth in travel will prevent an outright fall from the peak," Woodworth concluded. To purchase copies of the December 2016 editions of Hotel Horizons(r) for the U.S. lodging industry and 60 major markets, please visit: https://pip.cbrehotels.com CBRE Hotels is a specialized advisory group within CBRE providing capital markets, consulting, investment sales, research and valuation services to companies in the hotel sector. CBRE Hotels is comprised of more than 385 dedicated hospitality professionals located in 60 offices across the globe.