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Revenue Is Rising, But Collecting Is More Challenging

CBRE Hotels ·19 April 2019
Per the Uniform System of Accounts for the Lodging Industry, an account entitled "Provision for Doubtful Accounts" has been established in the Administrative and General Department of a hotel operating statement. Each month, hotel managers estimate the portion of their property's receivables that they do not believe will be collectible. The Provision for Doubtful Accounts records charges made to provide for the probable loss on accounts and notes receivable. An increase in the dollars expensed to this category indicates a rise in uncollectable accounts. Conversely, a decline in the Provision for Doubtful Accounts indicates that hotels overestimated the amount of amount of revenue they thought would be uncollectable.CBRE's annual Trends in the Hotel Industry survey of hotel operating statements tracks Provision for Doubtful Accounts, as well as Credit Card Commission payments. To analyze trends in hotel collections, we studied data for a sample of 1,456 properties that reported these two expense categories each year from 2010 to 2017 (most recent data available). The following paragraphs summarize our analysis.Doubt On The RiseFrom 2010 through 2017, the hotels in our research sample achieve a 4.7 percent compound annual increase (CAGR) in Total Operating Revenue. Concurrently, the amount set aside for doubtful accounts increased at a CAGR of 10.8 percent.Except for 2012, the annual change in Provision for Doubtful Accounts was greater than the change in Total Operating Revenue each year during the study period. This indicates that over the eight-year period, hotel operators have had to write-off greater amounts of uncollectable revenue than anticipated. Collections were most challenging during the years 2015 and 2016 when the annual change in the Provision for Doubtful Accounts approached 30 percent.The amount of funds expensed for bad collections is still a very small portion of total revenue. Over the eight-year period, the Provision for Doubtful Accounts averaged just 0.047 percent of Total Operating Revenue per year. However, it did peak at 0.063 percent in 2017.Due to the greater transient orientation of limited-service, all-suite, and extended-stay hotels, these properties had the highest ratios of Provision for Doubtful Accounts to Total Operating Revenue in 2017. Convention Hotels, with an extreme orientation to group business, had the lowest ratio.Collecting With Credit CardsWhile an increased acceptance of credit card payments provides greater assurance of collection, it does come at a cost. Like the Provision For Doubtful Accounts, Credit Card Commission payments have grown at a greater pace than revenue the past eight years. From 2010 to 2017, while Total Operating Revenue was rising at a CAGR of 4.7 percent, Credit Card Commissions were increasing at a CAGR of 5.5 percent. Over the past eight years, Credit Card Commissions as a percent of Total Operating Revenue has grown from a low of 2.20 percent in 2010 to 2.33 percent in 2017.Based on our analysis, the greater growth rate for Credit Card Commissions can be attributed to a combination of rising discount rates, and an increased incidence of the use of credit cards. To estimate the usage of credit cards within U.S. hotels, CBRE made assumptions using information from the following sources:Credit card discount rates were estimated from a survey of hotel financial executivesLodging and sales tax estimates were made based on information from public sourcesGratuity assumptions were derived from our general industry knowledge and revenue mix data taken from the CBRE Trends databaseFrom 2010 through 2017, CBRE estimates that 83.7 percent of Total Operating Revenue at the hotels in the survey sample was charged to credit cards. Credit card usage peaked in 2015 at 85.0 percent. Credit card use was lowest in 2017 (80.1%).In 2017, credit card usage was greatest at extended-stay hotels (93.5%) and all-suite properties (88.1%). Resorts (63.6%) and convention hotels (75.6%) had the lowest levels of credit card use.A DisconnectWhen comparing recent trends in the Provision for Doubtful Accounts and Credit Card Commission payments we find a disconnect. It is reasonable to assume that a higher of level of credit card use should result in a decline in ability to collect. Therefore, the increased use of credit cards over the past eight years should have resulted in a deduction in the Provision for Doubtful Accounts. Further, the property types with the highest levels of credit card use should have had the lowest levels of Provisions for Doubtful Accounts. In both circumstances, this was not the case.What this indicates is that hotels are subject to the recent rise in credit card defaults, delinquencies, and challenges that all industries have faced. In addition, the transient nature of travelers using credit cards at all-suite and extended-stay hotels helps explain the greater levels of doubtful collections at these property types.As the lodging industry begins to accept more and diverse forms of electronic payment methods, this will not absolve hotels from bad collections. Property level controllers, as well as corporate financial executives, need to adjust the methods they use to assess and estimate their Provision for Doubtful Accounts to match the benefits and shortfalls of the new technologies.This article was published in the March 2019 edition of Lodging.

Video: CBRE's Mark Woodworth Discusses Expected U.S. Lodging Outlook

CBRE Hotels ·25 March 2019
According to the March 2019 edition ofHotel Horizons, CBRE Hotels Americas Research is forecasting U.S. hotel RevPAR to increase by 2.5% in 2019, due in large part to a favorable economic outlook through 2020. However, an economic slowdown in 2021 will cause a short-lived softening of lodging industry fundamentals.

Hotel Spas: Not Just For Resorts Anymore

CBRE Hotels ·22 March 2019
According to the December 2018 edition of CBRE's Hotel Horizons, the annual growth in RevPAR for U.S. hotels is forecast to decelerate from 2.8 percent in 2018 to 0.1 percent in 2021. As the main source of hotel revenue is plateauing, hoteliers are looking up and down their operating statements to find alternative sources of income. For hotels that operate a spa, this department has stood out as a bright spot not only for growth in revenue, but gains in profits as well.The slowdown in revenue growth will be particularly acute in the nation's major markets. Since 2010, the majority of new hotel rooms entered into the larger urban cities making market conditions very competitive. Therefore, urban hotels are increasingly relying on their spa operations not only to boost revenue, but to help define the identity and character of the property within the greater marketplace. At first, spas were added to urban corporate and convention hotels to remain competitive with resorts for group demand. Now, operating a hotel spa on premise promotes an environment of wellness throughout the hotel that is desired by all types of travelers looking to maintain their healthy routines while away from home.Since 2007, CBRE has published the annual Trends in the Hotel Spa Industry report. For the 2018 edition, 192 hotels across the U.S. provided detailed revenue and expense data for their spa operation. Of the total sample, 60 spas were in transient hotels located within the nation's major markets. For this analysis, we refer to these properties as "urban hotels", versus the remainder of the sample which consists of traditional resorts located in rural or remote destinations.The following paragraphs highlight the performance of urban hotel spas during 2017.RevenuesIn 2017, urban hotel spas enjoyed a 6.5 percent increase in revenue. This is greater than the 3.1 percent increase observed at resort spas. During the year, spa revenues represented 3.5 percent of total hotel revenue at resort hotels. As expected, this is greater than the same ratio at urban hotels, but not by much. In 2017, spa revenue accounted for 3.1 percent of total revenue at urban hotels.One reason urban hotel spas can generate significant levels of revenue is their ability to capture customers from the local market, not just hotel guests. In 2017, local residents and members accounted for 59 percent of spa department revenue at urban hotels. This compares to 41 percent at resort hotels. In addition to paying for spa services, local patrons are a source for other ancillary revenue, such as the spa's retail shop and the hotel's restaurants. Local membership programs, while providing a steady income stream, serve as an important marketing tool and help increase awareness of a hotel within the local community.Urban hotel spas are also more efficient at capturing revenue than their resort counterparts. In 2017, urban hotel spas captured $226.57 in revenue per-square-foot compared to $180.23 at resort spas. This efficient use of space is particularly important for urban hotels where land is scarce and development costs are much higher. Urban hotel spa customers also spend slightly more per treatment ($164.71) compared to resort spa customers ($162.03).Expenses and ProfitsBecause of their location, urban hotel spas experience increased costs of operations. Accordingly, urban hotel spa department profit margins (21.4%) are less than those at resort spas (25.9%). Not only are operating costs greater at urban spas, they are increasing at a faster pace. From 2016 to 2017, total spa department expenses at urban hotels increased by 4.0 percent compared to 0.9 percent at resort spas.Labor costs are the largest expense category for all hotel spas. At urban hotels spas, labor costs average 57.6 percent, compared to 55.3 percent at resort spas. Like overall department expense trends, labor costs at urban hotel spas grew at a greater pace (3.9%) than labor costs at resort spas (2.9%) from 2016 to 2017.Fortunately for urban hotel spa owners, the relatively strong increases in revenues offset the burden of rising operating costs. For the seventh consecutive year, urban hotels (16.8%) achieved greater growth in spa department profits compared to resort properties (9.8%).Discretionary incomes are increasing, as is the desire for self-care and wellness. This is true not just for hotel guests, but for local residents as well. As access to wellness services becomes more commonplace in residential communities and in the workplace, guests will increasingly expect hotels to offer these same services. Hotel guests will even make travel-based decisions based on such offerings. Therefore, hotels that capitalize on their spa and wellness services have the opportunity to increase revenues and profits. In turn, this will increase the value of the hotel for owners and operators.Mark VanStekelenburg, Managing Director, and Jenna Finkelstein, Senior Consultant, work in the Hotels Advisory department of the CBRE office in New York City. To purchase a copy of the Trends in the Hotel Spa Industry report please visit https://pip.cbrehotels.com/store, or call (855) 223-1200. This article was published in the February 2019 edition of Lodging.

CBRE Research Forecasts Healthy RevPar Growth for U.S. Hotels in 2019 and 2020

CBRE Hotels ·14 March 2019
Los Angeles - Continued favorable economic fundamentals are expected to lead to U.S. hotel rooms revenue per available room (RevPAR) growth of 2.5 percent in 2019 and 2.0 percent in 2020, according to the latest forecast from CBRE Hotels Americas Research."Supply, demand and pricing in the U.S. lodging industry are very similar to what we have observed the past few years," said R. Mark Woodworth, senior managing director of CBRE Hotels Americas Research. "For the most part, we expect the supply of hotel rooms entering the market to be absorbed by newly generated demand buoyed by a healthy economy. Further, while the nominal rate of change will be modest, we are projecting average daily rate (ADR) growth above the pace of inflation for 2019 and 2020."Hotel occupancy at hotels in the Greater Los Angeles area is forecast to climb roughly one percentage point to 81 percent this year, with revenue per available room, an industry measure of occupancy and rate, likely to increase 3.2 percent to $148. Average daily rates at higherpriced properties is expected to rise 1.4 percent to $231.79 in 2019 while climbing 2.8 percent to $119.40 at the lower-end spectrum. In both categories, occupancy is likely to slip by 1.2 percentage points to 82 percent and by 0.2 percentage points to 77 percent in 2020, respectively."Employment has been the main driver for demand in the U.S. and in this region," said CBRE Hotels Managing Director Jeff Lugosi. "We have continually seen 150,000 to 200,000 jobs being added per month, which has in turn added to outsized growth in the lodging space. The LA area has greatly benefitted from a diverse business and leisure marketplace. At the lower end, demand has been driven by young, first-time travelers and price-conscious vacationers."He added, "Looking into 2020, the likely softening in occupancy in this region is mostly related to elevated supply and some possible slowdown in certain metrics, such as employment growth, given the stage of the economic cycle we're in." Nationwide, a variety of factors have muted average daily rate growth during the past few years, including low inflation, increasing competition from non-traditional forms of lodging and the intervention of intermediary sales channels, according to 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.Additionally, several macro factors such as the 2008-09 banking crisis, European debt defaults, Brexit and U.S. government shutdowns have made travelers more cautious, resulting in shorter booking times, a decline in non-essential travel and enhanced price-sensitivity, according to Corgel.The March 2019 edition of Hotel Horizons for the U.S. lodging industry and 60 major markets can be purchased by visiting: https://pip.cbrehotels.com

U.S. Lodging Outlook Good Through 2020, Economic "Blip" Causes Slowdown In 2021 Before Returning to Positive Growth for 2020

CBRE Hotels ·25 February 2019
A favorable economic outlook will lead to continued growth in U.S. hotel revenues and profits through 2020. However, an economic slowdown in 2021 will cause a short-lived softening of lodging industry fundamentals that year. According to the March 2019 edition of Hotel Horizons, CBRE Hotels Americas Research is forecasting U.S. hotel rooms revenue per available room (RevPAR) to increase by 2.5 percent in 2019 and an additional 2.0 percent in 2020. However, for 2021, CBRE is projecting a slight decline in RevPAR of 0.6 percent. Fortunately for hoteliers, that immediately is followed by 1.4 percent RevPAR growth for 2022."In the near-term, the fundamentals of supply, demand and pricing in the U.S. lodging industry are very similar to what we have observed the past few years," said R. Mark Woodworth, senior managing director of CBRE Hotels Americas Research. "For the most part, the supply of hotel rooms entering the market will be absorbed by newly generated demand buoyed by a healthy economy. Further, while the nominal rate of change may be disappointing, we are projecting average daily rate (ADR) growth above the pace of inflation for 2019 and 2020."Gross Domestic Project (GDP) is a good barometer of the overall health of the U.S. economy. CBRE Econometric Advisors is forecasting the pace of GDP growth to be 2.4 percent in 2019, 1.5 percent in 2020, and 0.7 percent in 2021. Given the strong correlation between the health of the economy and travel, CBRE is projecting a commensurate deceleration in the demand for hotel rooms. CBRE forecasts lodging demand to increase by 1.9 percent in 2019 and 1.2 percent in 2020, followed by a decline of 0.1 percent in 2021."I would characterize the economic slowdown in 2021 as a blip (an unexpected, minor and typically temporary deviation from a general trend), not a dip (to sink, drop or slope downward). Further, the performance of the U.S. lodging industry in 2021 should be viewed as a slowdown, not a recession," Woodworth said. "In fact, we see the U.S. hotel market bouncing back strong in 2022 with a 2.5 percent increase in demand." ADR ConundrumDespite the anticipated slowdowns in the economy and lodging demand, the occupancy levels for the overall U.S. hotel market are forecast to remain at an average of almost 300 basis points above the long run average annual occupancy level through 2023. Unfortunately, despite such lofty occupancy levels, ADR growth will fall below inflation in 2021 and 2022."We have identified several factors that have muted ADR growth the past few years. These include low levels of inflation, increasing competition from non-traditional forms of lodging and the intervention of intermediary sales channels," 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."Another factor that we recently have analyzed is the elevated level of uncertainty that has infiltrated the minds of hotel guests. Since 2008, the level of uncertainty within the U.S., as measured by PolicyUncertainty.com, has risen by 30 percent over the previous 20 years. We suspect that incidents such as the banking crisis, European debt defaults, Brexit and U.S. government shutdowns made travelers feel uneasy," Corgel explained."What do people do when they feel uncertain about the future? I contend that they hesitate to make discretionary purchase decisions. In the hotel business, this means shorter booking times, a decline in non-essential travel and enhanced price-sensitivity. Our analysis estimates that U.S. average daily rates are roughly 0.5 percent lower than they would be without these elevated levels of uncertainty," Woodworth said.The BlipAs noted before, CBRE is projecting a 0.6 percent decline in RevPAR in 2021. All chain-scales are forecast to suffer declines in RevPAR during the slowdown, but some will be impacted more than others."A primary cause of the economic blip in 2021 is a forecast decline in the national levels of employment in both 2021 and 2022. Previous research conducted by CBRE found that the performance of hotels operating in the lower-priced chain-scales is closely correlated to changes in employment. Accordingly, our forecasts for 2021 RevPAR declines average 1.3 percent for the bottom three chain-scales. At the same time, the RevPAR falloff for upper-priced properties is expected to average just 0.8 percent," Woodworth noted."Despite the first indications of a potential softening in U.S. lodging performance, the industry still is forecast to operate at exceedingly high occupancy levels and profit margins. The growth story may not be as strong as hoteliers would prefer, but I would hardly classify hotel sector performance as poor," Woodworth concluded.The March 2019 edition of Hotel Horizons 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.

Unit-Level Hotel Marketing: P&L Reveals Changes In Department Functions

CBRE Hotels ·25 February 2019
These operational changes are evident when evaluating the expenses recorded within the Sales and Marketing Department on a property's operating statement. To gain a better understanding of how U.S. hotels are deploying their unit-level marketing dollars, we have examined the Sales and Marketing Department expenses of a same-store sample of 3,461 properties during the years 2016 and 2017 (latest data available as of the writing of this article). The study sample consisted solely of hotels that have on-site sales and marketing personnel. Franchise related fees and assessments were excluded from our analysis so we could focus exclusively on unit-level expenditures and tactics. In aggregate, the 3,461 properties averaged 233 rooms in size, with a 2017 occupancy of 75.7%, and an average daily rate (ADR) of $181.15.Variation by Property TypeIn 2017, the properties in our sample spent an average of $3,361 per available room (PAR) in the Sales and Marketing Department, exclusive of franchise related fees and assessments. Resorts spent the greatest amount on a PAR basis ($6,161), followed by Convention hotels ($4,182). These two property types still originate the sale of most of their business from on-site marketing efforts. Limited-service ($1,116) and extended-stay hotels ($1,176) are more reliant on the brands, and national corporate contracts, to generate demand for their properties.Our firm's Trends in the Hotel Industry survey tracks 12 different non-franchise related expense categories within the Sales and Marketing Department. These include seven labor related costs, and five specific marketing expenditure categories.Despite the increased use of technology, the combined costs of salaries, wages, and employee benefits accounted for more than half (56.4%) of all Sales and Marketing Department expenditures in 2017. Labor costs are the highest as a percentage of total department expenses at extended-stay (66.6%) and limited-service (61.6%) hotels. While the ratios appear to be high, these property types traditionally have an on-site marketing manager that is either a part-time employee, or a shared-service resource. Labor costs as a percentage of total department expenses are lowest at convention (49.4%) and resort (52.3%) hotels. These low ratios can be attributed to the extensive dollars spent on other on-site marketing functions and tactics.Website expenditures consume the 9.7 percent of total Sales and Marketing Department expenses. Per the 11th edition of the Uniform System of Accounts for the Lodging Industry, this expense category records the costs associated with the development and maintenance of a hotel's website, as well as functions such as responses to on-line reviews, search engine optimization, and e-Commerce costs. This ratio is greatest at full-service hotels (13.0%), and lowest at extended-stay properties (3.5%).Other discrete Sales and Marketing expenditures tracked by CBRE include Advertising (3.8% of department expenses) and Public Relations (3.2%). Given the group orientation of Convention Hotels, this property category appears to be least dependent on Advertising and Public Relations. Personal sales efforts are still more productive to capture group demand, as opposed to mass advertising, or local public relations initiatives. Conversely, Limited-service and Resort hotels rely on advertising to reach dispersed transient leisure travelers.Shifts in InvestmentBy evaluating the relative change in Sales and Marketing expenditures from 2016 to 2017, we clearly see where hotels are making investments, and where they are cutting back.From 2016 to 2017, the total non-franchise related Sales and Marketing Department expenditures for the study sample increased by 3.4 percent. This compares to a 1.6 percent rise in Total Operating Revenue for the sample during the same period.Labor costs grew by just 0.4 percent from 2016 to 2017, but remain the largest expense within the Sales and Marketing Department. It should be noted that the growth in labor costs was muted by a 2.6 percent decline in the amount of bonus payments made during the year. This is consistent with the concurrent slowdown in the growth of revenue.While the labor dollars have remained relatively flat, discussions with our clients reveal a continued change in the profile and capabilities of on-site sales personnel. Today's sales professionals need to possess the skills required to utilize the technology and software related to the internet, social media, revenue management, and channel distribution management systems.While the 201 percent increase in Website expenditures is distorted by the low dollar figures, we believe it is emblematic of the growing focus on reaching customers via the internet. Much of the costs associated with communicating with guests before, during and after their stays are captured in the Website category. Conversely, we observed a 6.2 percent decline in Advertising expenses during 2017, along with a 30.1 percent drop in Public Relations costs. These two expense categories record traditional marketing tactics that are being replaced, or updated, by more efficient methods.EfficiencyAccording to the September 2018 edition of CBRE's Hotel Horizons forecast report, revenue per available room (RevPAR) growth is expected to range from 1.0 percent to 2.6 percent from 2019 through 2022. During this period, occupancy levels should remain near the record high of roughly 66.0 percent. This indicates that the demand for lodging will remain strong.The challenge for Sales and Marketing professionals is to efficiently capture this demand at their hotels. Based on the story told by analyzing the expenditures within the Sales and Marketing Department, this can be accomplished by a combination of enhanced technology, and staffing with personnel able to leverage the technology.Robert Mandelbaum and Viet Vo work in the CBRE Hotels Americas Research. To benchmark the expenditures of your Sales and Marketing Department, please visit pip.cbrehotels.com/benchmarker. This article was published in the January 2019 edition of Lodging.

Historic Hotels Continue Performance Premium

CBRE Hotels ·28 January 2019
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 fourth 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 Economic Advisors, to prepare its lodging forecasts.Key points presented by Mark Woodworth, Senior Managing Director at CBRE, to more than 240 owners, asset managers, general managers, and sales and marketing leaders at the Historic Hotels of America annual conference at The Broadmoor (1918) include:Per STR, through the first three quarters of 2018, 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. (Luxury RevPAR $250.76, upper upscale RevPAR $140.48).Over the next two years (2019 and 2020), RevPAR for historic hotels is expected to grow at an average annual rate of 1.45 percent, which is more than the RevPAR forecast for the nation's upper upscale hotels at 0.5 percent, but less than luxury hotels at 3.95 percent. 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 approximately 8.3 percent 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 $277.87, higher by more than 16.36 percent than the $238.78 ADR for contemporary hotels. (See chart below)Since 2009, historic resort hotels have achieved greater revenue and profit growth compared to their contemporary counterparts."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. "Historic hotels can achieve a significant advantage in ADR and REVPAR versus contemporary hotels, especially when recognized as part of Historic Hotels of America. While promoting its history helps a historic hotel differentiate itself from other hotels, being part of Historic Hotels of America validates the differentiation. For the fifth 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."About Historic Hotels of AmericaHistoric Hotels of America is the official program of the National Trust for Historic Preservation for recognizing and celebrating the finest Historic Hotels. Historic Hotels of America includes more than 300 historic hotels, historic resorts, and small historic inns. These historic hotels have all faithfully maintained their authenticity, sense of place, and architectural integrity in the United States of America, including 44 states, the District of Columbia, the U.S. Virgin Islands, and Puerto Rico. Historic Hotels of America is comprised of mostly independently owned and operated properties. More than 30 of the world's finest hospitality brands, chains, and collections are represented in Historic Hotels of America. To be nominated and selected for membership into this prestigious program, a hotel must be at least 50 years old; has been designated by the U.S. Secretary of the Interior as a National Historic Landmark or listed in or eligible for listing in the National Register of Historic Places; and recognized as having historic significance. For more information, please visit HistoricHotels.org.

CBRE forecasts strong ADR and RevPAR for historic hotels

CBRE Hotels ·14 January 2019
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 fourth consecutive year, CBRE Hotels' Americas Researchpresented 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 Economic Advisors, to prepare its lodging forecasts.Key points presented by Mark Woodworth, Senior Managing Director at CBRE, to more than 240 owners, asset managers, general managers, and sales and marketing leaders at the HistoricHotels of America annual conference at The Broadmoor (1918)include:* Per STR, through the first three quarters of 2018, 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. (Luxury RevPAR $250.76, upper upscale RevPAR $140.48).* Over the next two years (2019 and 2020), RevPAR for historic hotels is expected to grow at an average annual rate of 1.45 percent, which is more than the RevPAR forecast for the nation's upper upscale hotels at 0.5 percent, but less than luxury hotels at 3.95 percent. 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 approximately 8.3 percent 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 $277.87, higher by more than 16.36 percentthan the $238.78 ADR for contemporary hotels. (See chart below)* Since 2009, historic resort hotels have achieved greater revenue and profit growth compared to their contemporary counterparts."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. "Historic hotels can achieve a significant advantage in ADR and REVPAR versus contemporary hotels, especially when recognized as part of Historic Hotels of America. While promoting its history helps a historic hotel differentiate itself from other hotels, being part of Historic Hotels of America validates the differentiation. For the fifth 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."About Historic Hotels of AmericaHistoric Hotels of America is the official program of the National Trust for Historic Preservation for recognizing and celebrating the finest Historic Hotels. Historic Hotels of America includes morethan 300 historic hotels, historic resorts, and small historic inns. These historic hotels have all faithfully maintained their authenticity, sense of place, and architectural integrity in the United States of America, including 44 states, the District of Columbia, the U.S. Virgin Islands, and Puerto Rico. Historic Hotels of America is comprised of mostly independently owned and operated properties. More than 30 of the world's finest hospitality brands, chains, and collections are represented in Historic Hotels of America. To be nominated and selected for membership into this prestigious program, a hotel must be at least 50 years old; has been designated by the U.S. Secretary of the Interior as a National Historic Landmark or listed in or eligible for listing in the National Register of Historic Places; and recognized as having historic significance. For more information, please visit HistoricHotels.org.

U.S. Hotels Experienced Another Strong Year In 2018, But What's On The Horizon?

CBRE Hotels · 4 January 2019
CBRE's Mark Woodworth and Jack Corgel wrap up 2018 with their take on the overall health of the economy, what indicators may tell us about the possibility of a recession on the horizon, and what period to period demand change says about overall economic performance.
Article by Robert Mandelbaum

Boutique Hotels: Premium Performance Impacts Flow-through

CBRE Hotels ·21 December 2018
While boutique hotels comprised just 3.2 percent of the total U.S. lodging supply in 2017, boutique projects represented 17.8 percent of the rooms in the development pipeline as of June 2018. Boutique hotels are popular with developers for a variety of reasons:* They frequently offer unique, localized experiences that are favored by today's travelers* They give the developer an opportunity to be creative with the facilities and services offered* They achieve premium levels of occupancy and ADRTo gain a better understanding of the performance of this popular segment of the lodging industry, CBRE Hotels' Americas Research (CBRE) partnered with the Boutique and Lifestyle Leaders Association (BLLA) to develop six competitive classification categories. The categories are based on a combination of branding, management, and chain-scale, three factors that influence the market position and performance of boutique and lifestyle hotels. The six competitive classification categories, along with representative brands, are listed below:* Legacy Brands/Upper-Priced: Andaz, Canopy, Indigo, Kimpton, W Hotel* Legacy Brands/Lower-Priced: A/C, aloft Hotel, MOXY, Tru* Soft Brands: Autograph, Best Western Premier, Curio, Hyatt Unbound* Referral Groups/Independent Properties: Historic Hotels, Leading Hotels, Small Luxury Hotels* Boutique-Lifestyle Brands/Luxury: Belmond, Montage, Thompson, Valencia* Boutique-Lifestyle Brands/Upper-Upscale: Affinia, Charlestowne, Joie De VivreUsing these six categories, CBRE publishes quarterly forecast reports that present three-year projections of occupancy, average daily rate (ADR) and RevPAR. Further, once a year the report provides revenue, expense, and profit metrics that allow boutique owners and operators to benchmark the financial performance of their hotels.As the budgets for 2019 performance are being finalized, we present the latest forecast and financial benchmarks from the September 2018 edition of Trends and Expectations for Boutique and Lifestyle Hotels.MARKET PERFORMANCEIn 2017, the 1,281 properties in the U.S. designated by BLLA and CBRE as boutique and lifestyle hotels achieved an aggregated occupancy of 70.5 percent, and an ADR of $208.52. This represents a 6.9 percent occupancy premium, and a 64.7 percent ADR premium, compared to the performance of the overall U.S. lodging industry for the year. During 2017, hotels in the Boutique-Lifestyle Brands/Upper-Upscale category achieved the greatest occupancy level (79.6%), while the boutique properties that are either non-branded, or members of a referral group earned the highest ADR ($253.14).Through June of 2018, the boutique segment appears to be maintaining its premium performance levels. Through the first six months of the year, RevPAR levels are up nearly 5.0 percent from the first half of 2017. Leading the RevPAR gains are the boutique properties in the Legacy Brands/Lower-Priced and Boutique-Lifestyle Brands/Luxury segments.Looking towards 2019, all six categories are once again forecast to achieve gains in RevPAR. However, like the U.S. lodging industry as a whole, the pace of RevPAR growth will slow down. Boutique-Lifestyle Brands/Luxury properties are projected to enjoy a RevPAR gain of 3.1 percent in 2019. RevPAR growth for the remaining five categories is expected to be less than 2.0 percent.FINANCIAL PERFORMANCEBecause of the comparatively high levels of personal service and food and beverage offerings, boutique hotels do achieve relatively low profit margins compared to industry-wide benchmarks. Using data from CBRE's Trends in the Hotel Industry survey, properties that meet the BLLA/CBRE definition of a boutique hotel achieved an average gross operating profit (GOP) margin of 33.8 percent in 2017. This is less than the 38.3 percent average for all hotels in the Trends sample.The impact of the higher levels of labor and food and beverage can be seen in the total operated departmental expense ratios. On average, the boutique hotels in the Trends sample averaged a total departmental expense ratio of 41.0 percent of total operating revenue. This is greater than the 37.5 percent average for the entire Trends sample. Conversely, the average undistributed department expense ratio for boutique hotels (25.2%) is just slightly above the overall sample average of 24.3 percent.As would be expected, GOP margins for boutique hotels are clearly influenced by the offering of food and beverage. Boutique hotels that have restaurants and lounges achieved a GOP margin of 33.3 percent in 2017. Concurrently, boutique properties that do not offer food and beverage service averaged 47.1 percent. When analyzing GOP margins across the six competitive classification categories, we find an inverse correlation between the ratio of food and beverage revenue to total revenue, and the GOP margin.INVESTMENT IN HOSPITALITYFor owners and developers, an investment in boutique and lifestyle hotels is an investment in hospitality. Historically, this segment has been at the forefront of new and creative facilities, services, and amenities all aimed at providing a more personal level of service and a unique experience. Yes, this puts a strain on operating expenses, and therefore limits the flow through to the bottom-line. Fortunately, the premium occupancy and ADRs achieved by these hotels provide the opportunity to achieve profit levels that deliver the desired return on investment.

U.S. Hotels Forecast to Enjoy Tenth Consecutive Year of Growth - CBRE Reports

CBRE Hotels · 8 December 2018
CBRE Hotels Americas Research is forecasting record occupancy in 2019 amid solid economic growth. Mark Woodworth, Senior Managing Director with CBRE Hotels, discussed our updated December 2018 edition of Hotel Horizons.;ljlkj

Economic Outlook Solid for 2019: U.S. Hotels Forecast to Enjoy Tenth Consecutive Year of Growth According to Hotel Horizons Dec. 2018 Edition

CBRE Hotels ·28 November 2018
Atlanta -- Based on an upward revised outlook for the U.S. economy, CBRE Hotels Americas Research is forecasting the nations hotels will enjoy a 10th consecutive year of growth in 2019. According to the December 2018 edition of Hotel Horizons, U.S. hotel occupancy will rise to 66.2 percent next year, a fifth straight record level. The growth in occupancy is primarily the result of a projected 2.1 percent increase in demand, more than enough to offset an estimated net increase in supply of 1.9 percent for the year.It all starts with the demand for lodging accommodations. Without leisure, corporate and group travelers on the road seeking hotel rooms, there is no need to worry about all the other performance metrics, said R. Mark Woodworth, senior managing director of CBRE Hotels Americas Research. From1988 through 2017, the average annual gain in accommodated room nights in the U.S. was 2.0 percent. For 2018 and 2019, we believe demand growth will exceed this long-run average.CBRE Hotels Americas Research has been forecasting the performance of the U.S. hotel market using its proprietary Hotel Horizons econometric model since 2001. The model identifies the historical relationship between the changes in nations economy and changes in lodging demand. These relationships then are applied to project future demand.CBRE Econometric Advisors (CBRE-EA) is our in-house source for the economic forecasts that drive our models, 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. After analyzing data through the third quarter of 2018, CBRE-EA issued an upward revision to its outlook for U.S. Gross Domestic Product in 2018 and 2019.The improvement in the CBRE-EA economic forecast is based on the remaining impact of the fiscal boost from tax-law changes, capital spending, improving wage growth and consumer confidence. We have already seen the positive influence these factors have on the economy, and lodging industry, in 2018. The impact will persist in 2019, Corgel said.Given the upward revision to the economic forecast, our projections for 2019 growth in demand have risen from the 1.9 percent figure presented in our September 2018 report to the 2.1 percent in the current December 2018 report. The direct result is a boost in our 2019 projected occupancy level from 66.1 percent to 66.2 percent, Woodworth said.Market ForecastsWhile lodging demand for the entire U.S. market is forecast to increase by 2.1 percent in 2019, the demand for accommodations in the 60 markets covered by CBRE is projected to grow by a strong 3.3 percent. This is significant because the majority of hotel investment activity occurs in the nations largest cities. Supply growth in the 60 market Hotel Horizons universe (3.6 percent) is forecast to be almost double that of the nation as whole (1.9 percent).Supply is expected to grow at a greater pace than demand in 65 percent of our Horizons markets during 2019. However, despite the surge in new competition in these preferred markets, all 60 will enjoy an increase in ADR. In fact, we are forecasting ADR increases greater than the projected 2.2 percent pace of inflation in 39 of our 60 markets, Woodworth noted. Jacksonville, San Jose-Santa Cruz, San Francisco, Newark, and Atlanta are all lodging markets forecast to enjoy 4.4 percent or more ADR growth in 2019.Despite the continuation of demand growth and record occupancy levels, concerns persist about the level of room-rate increases. To that, I direct peoples attention to the pricing dynamics we are seeing at the local level, Corgel stated. Looking at the Hotel Horizons market data, we find a correlation between the occupancy level, changes in occupancy and changes in ADR. In short, markets with the greatest increases in ADR are those with the highest occupancy levels and strongest changes in occupancy. It is apparent that property-level operators in high-performing markets are taking advantage of the basics of supply and demand when setting their room rates.Beyond 2019With so many consecutive years of record occupancy levels and demand growth, hotel owners and operators worry about the inevitable time when this period of extended prosperity will come to an end. After all, lodging is a cyclical industry.CBRE is not forecasting any economic or lodging industry recessions through 2022. However, industry growth is forecast to curtail beyond 2019. CBRE-EA sees higher interest rates, equity market corrections, credit-market problems and some shrinkage in employment as risk factors occurring in late 2019 and 2020 that adversely will affect the lodging industry in 2021. Fortunately, the economic slowdown is expected to be relatively mild and short.The year 2021 seems far away for most industry participants, however, those with an ownership interest need to be planning their future investment strategies. In the meantime, the magnitude of profit growth may not be spectacular, but the probability for revenue growth is solid, and operating margins remain well above historical levels, Woodworth concluded.The December 2018 edition of Hotel Horizons for the U.S. lodging industry and 60 major markets can be purchased by visiting: https://pip.cbrehotels.com

CBRE: U.S. Occupancy Decline Breaks Seven Quarter Growth Streak

CBRE Hotels ·16 November 2018
For the first time since the third quarter of 2016, the growth in the quarterly demand for hotel rooms in the United States fell short of the concurrent change in supply. Some of the resulting Q3 2018 decline in occupancy can be explained by unfavorable comparisons to Q3 2017 when major hurricanes impacted markets in Texas and Florida.Occupancy drops, breaks seven-quarter growth streakHotel demand grew 1.6% nationally in Q3, down from 3.1% in Q2. Supply growth remained at 2.0%.Pittsburgh had the largest year-over-year demand increase (9.2%). High gains also occurred in Phoenix (7.6%) and Raleigh-Durham (7.1%).National occupancy declined by 0.4% year-over-year, the largest drop since Q1 2016 and the second-largest since the last recession. The drop in occupancy is largely attributable to abnormally higher demand last year due to the Texas and Florida hurricanes.ADR grew by 2.1% nationally in Q3, well above the 1.5% rate in Q3 2017 but below the growth rate of the past three quarters.Thirty-eight of the 60 markets tracked by CBRE Hotels' Americas Research had supply gains of more than 2% in Q3, one more than in Q2. Thirty-four markets had declines in occupancy, 15 more than in Q2.DOWNLOAD REPORT
Article by Robert Mandelbaum and Gary McDade

Dual-branded Hotels: Beware Expectations Of Significant Operating Efficiencies

CBRE Hotels ·16 November 2018
For the past four years the opening of dual-branded properties has been very popular among hotel developers. The perceived benefits of building a property with two or more brands are many:* Two reservation systems to channel business to the property* Two brands that will appeal to different demand segments in the market* Enhanced ability to maximize land density requirements* Efficiencies in the construction of the facility (ex. one laundry room for two hotels)* Efficiencies in the operation of the hotels (ex. shared staffing)Using data from CBRE's annual Trends in the Hotel Industry survey of operating statements from thousands of hotels across the U.S., we conducted an analysis that tested the theoretical operating efficiencies of a dual-branded property. The hypothesis is that operating two hotels within one structure should allow management to achieve operating efficiencies because of shared services, labor, management, and facilities.Within the Trends database we identified 25 operating statements for dual-branded hotels for the year 2017. Two of the properties were removed from the sample as outliers because of the large number of combined rooms, and urban location within a major market. In aggregate the remaining 23 properties averaged 309 rooms in size, a 2017 average daily rate (ADR) of $171.69, and an annual occupancy level of 75.9 percent.Among the survey sample we observed three different combinations of property types:* Limited-Service and Select-Service: 3 properties* Select-Service and Extended-Stay: 13 properties* Limited-Service and Extended-Stay: 7 propertiesFor each of the property type components of each of the dual-branded hotels we selected 2017 operating statements from the Trends database for comparable properties that were sole-branded hotels. The statements for the comparable properties were selected based on property type, number of rooms, occupancy and ADR. The comparable statements were then added together to match the size and performance of the respective dual-branded hotels.The following paragraphs summarize the findings of our comparative analysis.OPERATED DEPARTMENTSWhen comparing total operated department expenses as a percent of total operating revenue we did not find any efficiencies achieved by the dual-branded hotels. Across all three categories, the operated department expense ratios for the dual-branded properties were greater than the comparable groupings.Since the dual-branded properties in our analysis were either limited-service, select-service, or extended-stay hotels, the rooms department comprises the majority of total operated department expenses. Further, within the rooms department, labor costs average over half of the expenses. Therefore, it is reasonable to assume that a dual-branded hotel would benefit from sharing front desk, housekeeping, laundry, and bell staffs.Unfortunately, these labor efficiencies did not appear to materialize. Across the board, the rooms department ratios for the dual-branded hotels averaged 22.8 percent, compared to 22.0 percent at the comparable properties. Rooms department operating efficiencies were only observed at the Select-Service/Limited-Service dual-branded properties. From discussions with our clients we understand that brand standards frequently require discrete check-in areas and employee uniforms within dual-branded hotels. Such requirements limit the ability of operators to benefit from shared staffing.UNDISTRIBUTED DEPARTMENTSUndistributed departments in hotels are more administrative in nature and less guest-facing than the operated departments. It is in these overhead departments, where we observed the greatest operating efficiencies for the dual-branded properties. Measured as a percent of total operating revenue, the dual-branded hotels achieved undistributed department expense ratios two to three percentage points less than their respective comparable properties across all three property combination categories.Less incumbered by brand standards, it appears that hotels are able to share staffing for such back-of-the-house functions as general management, accounting, security, marketing, and maintenance. Further, combining two properties under one roof allows for more efficient energy consumption.PROFITSBased mainly on the ability to achieve operating efficiencies within the undistributed departments, the dual-branded hotels on average did achieve slightly greater profit margins compared to the comparable properties. This was true across all three dual-branded categories. Since we were measuring operating efficiencies, profit for this analysis was defined as gross operating profit.This finding of just "slightly better" profit margins is consistent with a similar analysis performed by CBRE in April of 2015. Since it is widely believed operating efficiencies are a major benefit when developing a dual-branded hotel, owners of these properties should be careful not to base the financial feasibility of their project solely on expectations of greater profit margins.As noted earlier, there are several other benefits that dual-branded hotels provide. These benefits help to improve revenues (two reservation systems) and reduce development costs (shared amenities such as a pool, exercise room, and meeting space) . It is these factors that may end up being the most important when determining if a dual-branded hotel is the appropriate property type to develop.Robert Mandelbaum and Gary McDade work in the Research Department of CBRE Hotels' Americas Research. Gary McDade is a Senior Research Analyst. To benchmark the performance of your dual-branded hotel (existing or proposed) please visit https://pip.cbrehotels.com/store, or call (855) 223-1200. This article was published in the October 2018 edition of Lodging.

Late Cycle Supply Sources of the Occupancy Gap By Bram Gallagher

CBRE Hotels ·24 October 2018
These cycles, occurring from August 1992 to November 2002 and November 2002 to May 2010, lasted approximately ten and eight years, respectively. Well into the ninth year of its current cycle, we would expect that the hotel market would be showing the tell-tale occupancy and rate growth pattern seen in previous late-cycle periods; however, rather than driving RevPAR, real ADR (RADR) is barely moving nationally. Where we would have seen declining occupancies in the past, present occupancies are breaking new records seemingly every quarter.Something may have changed about the way the hotel market operates, and several theories have been proposed or considered as possible explanations. While the traditional suspect for downturns in real RevPAR (RRevPAR) growth is supply overbuilding, recent developments in disruptive short-term lodging companies such as Airbnb have been raised as a possible contributor to sluggish rate growth.In this article, I investigate the size of the discrepancy between occupancy and RADR. I then look to growth in conventional supply and in unconventional, short-term lodging supply. These two supply issues seem to bear equal weight in explaining the strange occupancy and rate behavior, and taken together account for more than half of the apparent gap between real RADR and occupancy.1. Contribution BreakdownRevPAR growth stems from both changes to ADR and occupancy. (Changes in RevPAR can be decomposed into the two contributions of its constituent components, Average Daily Rate (ADR) and Occupancy. RevPAR can be defined as RevPAR=ADRxOccupancy. Taking the total derivative yields dRevPAR=dADRxOccupancy+dOccupancyxADR, substituting the discrete approximation yields).Breaking RevPAR into its two parts has, for the previous two cycles, provided a characteristic progression through the lodging cycle. Exhibit 1 illustrates this decomposition applied to the national hotel market, adjusted for inflation using the national CPI and using a 4-quarter moving average of occupancy for comparison.The typical pattern can be easily observed in previous cycles. Early positive occupancy contributions change to negative in the later portion of the cycle. RADR contributions increase in importance and come to dominate in the middle or late cycle. Although the beginnings of this pattern began to emerge, and occupancy's contribution even became negative briefly in Q1 2016, afterwards occupancy again began to rise while real ADR stagnated or retreated. As a result, an unprecedented gulf between the observed occupancy and the growth of RADR and RRevPAR has opened, beginning around 2015 with a steep decline in RRevPAR growth. I call this distance the 'occupancy gap'.2. Magnitude of the Gap and Markets Affected(?RevPAR=?ADRxOccupancy+?OccupancyxADR.. where is the contribution from changes in ADR and is the contribution from changes in occupancy. Dividing the contribution by RevPAR yields the percentage change in RevPAR attributable to that contribution's variable.)I assess the scale of the gap to find out how important this effect is, which markets are affected and what the related variables are. The gap can be measured two ways: how low RADR is given where occupancy is or how high occupancy is given RADR. An estimate of the size of the RADR shortfall can be obtained by estimating, with an econometric model, relationships between hotel performance and economic variables up to Q3 2015, then fitting these relationships with the observed demand and supply.The amount that this fitted RADR would have contributed to RRevPAR is illustrated in yellow in Exhibit 2. Since Q3 2015, RRevPAR has grown an average of 2.1% less year-over-year than if RADR had grown commensurately with what the historical occupancy and RADR relationship suggests. Over the same period, observed RRevPAR growth only achieved 1.5% year-over-year growth, less than half the expectation given the occupancy and historical relationships. Note that the entire gap is not filled with the modelled ADR contribution.Alternatively, the gap can be quantified by estimating how much excess occupancy there is given the low RADR growth rate. I estimate the effect of occupancy on RADR growth along with a dummy variable that allows the effect to change on or after 2015. This procedure essentially estimates whether the threshold occupancy that triggers increases to RADR, called the natural occupancy rate, has changed, and what direction that change has taken.Of the 60 markets that CBRE Hotels' Americas Research tracks most closely, 18 had no statistically significant effect. This means that either the effect has not taken place, or has arisen so recently that it is indistinguishable from statistical noise. Another 41 markets had a significant effect that raised the natural occupancy threshold, making it more difficult for hotels to raise rates in those markets. Tucson was the only market that had a significant decrease in the natural occupancy threshold, making it easier to raise rates. The markets are detailed in Exhibit 3 below.3. Potential Causes: Hotel SupplyWhy are rates not seeing the expected growth given the high and increasing occupancy? I investigate two supply-related causes of the slower-than-expected RADR growth: increases to conventional hotel supply that constrain revenue manager's pricing power while keeping occupancy high and increases to unconventional sharing economy supply that may limit compression pricing.Hotel operators are concerned with over-supply with good reason. Increases to supply may reduce the attractiveness of older properties and increase competition in the market as a whole, stalling or even lowering rates. It could be the case that tepid RADR and plunging RevPAR growth are the results of late-cycle supply additions accelerating. If this was the case, then we would expect that supply growth in the markets that have a significant occupancy gap to exceed that of the markets that do not. Exhibit 4 plots changes to RADR against changes to supply in 60 markets over the period in which the gap occurred-Q2 2014 through Q2 2018. The market size in rooms is reflected by the size of the representative dot, and markets with a significant occupancy gap are in green. Markets with no significant gap are in magenta.The negative relationship between supply growth and RADR growth is described by the dashed orange line. Although the change in supply seems to have some association with the presence of an occupancy gap, there are some markets with no gap that have high changes to supply, such as Cleveland, and markets that have a significant gap and low changes to supply, such as Jacksonville. No market with an occupancy gap has a supply growth rate of lower than 0.4%, and every market with supply growth greater than 3.6% has a significant gap. When analyzed in isolation, supply changes can explain between a quarter and a third of the variation in the size of the occupancy gap.4. Short-Term Accommodations DisruptionUnconventional supply changes in the form of sharing economy listings on sites such as HomeAway and Airbnb may also represent an increase in competition in a market. Sharing economy sites can quickly adjust supply available during peak demand or whenever some unknown reservation RADR is reached. In the presence of sharing economy alternatives not only are consumers more price sensitive in the face of more accommodation options, but also supply becomes price-sensitive.The possibility of new supply entering as RADR increases may convince revenue managers to restrict rate increases preventatively, resulting in higher occupancy and lower rates than otherwise. The peak demand RADR is trimmed off by sharing economy flexible supply, having the effect of lowering average RADR and thus expanding the gap. Exhibit 5 illustrates the size of the occupancy gap along with the supply of Airbnb listings, the largest single source of sharing economy listings, as a percentage of the markets' total hotel supply.When analyzed by itself, Airbnb listings have about the same explanatory power as conventional supply shifts-between one-quarter and one-third of the variation in the occupancy gap across markets is explained by Airbnb listings. When using both supply change and Airbnb listings, over one half (R2=53%) of the variation is explained and both explanatory variables are very precisely estimated (t>5), indicating that the two variables are each contributing unique explanatory information. It is important to keep in mind that the explanatory power described here is indicative of correlation, rather than causation, but variables estimated with this high a degree of precision and correlation that have sound theoretical reasons for affecting the gap in the manner estimated are excellent candidates for important causes of the occupancy gap.The occupancy gap remains an ongoing, distinguishing feature of the current hotel cycle. The causes of the gap, rather than being monolithic, likely stem from many causes working together to push the lodging market in previously uncharted territory. In this paper, I have described some promising factors. While significant research into alternative explanations such as the rise of online travel agencies and new revenue management technologies remains, conventional and unconventional supply changes may go a long way to solving the occupancy gap puzzle.Reprinted from the Hotel Business Review with permission from www.HotelExecutive.com

U.S. Lodging Performance Fell Short Of Budget In 2017 | By Robert Mandelbaum

CBRE Hotels ·22 October 2018
As general managers, controllers, and directors of sales begin the process of preparing their budgets and marketing plans for 2019, we present the results of our most recent look at the budgeting accuracy of U.S. hotel operators. From CBRE Hotel's Americas Research's Trends in the Hotel Industry database, we identified 722 operating statements that contained both actual and budgeted data for 2017. Using these statements, we compared the revenues, expenses, and profits projected for 2017 with what was actually earned and spent during the year. For the purpose of this analysis, profits are defined as earnings before interest, taxes, depreciation and amortization (EBITDA).Revenue ShortfallFor 2017, the hotels in our sample budgeted for a 3.2 percent gain in total operating revenue. Unfortunately, total revenue growth amounted to just 1.7 percent for the year. Since rooms revenue made up 63.8 percent of total revenue for the year, it was the budget deficiencies in occupancy and ADR that were the primary causes of the revenue shortfall.Given the continued growth in lodging demand since the recession in 2009, it is not surprising that the hotels in our sample budgeted for another 0.8 percent increase in occupancy from 2016 to 2017. Unfortunately, these same hoteliers did not enjoy the occupancy gain they had hoped for. In 2017, the hotels in our study sample suffered a 0.1 percent decline in occupancy.Another indication of weaker than expected market conditions was the sluggish growth in ADR. The properties in our study sample were able to achieve a 1.8 percent gain in ADR during 2017, however, this was less than the forecast growth rate of 2.5 percent. Combined, the decline in occupancy and slow ADR growth rate resulted in a rooms revenue gain (1.7%) that was nearly half the budgeted growth rate of 3.3 percent. Expense Efficiencies Not EnoughBy accommodating fewer rooms than budgeted, the hotels in our sample did incur less expense growth than planned. During 2017, expenses at the properties in the study sample increased by 2.3 percent. This is 0.3 percentage points less than the budgeted expense growth rate of 2.6 percent.Muting the benefit of the lower accommodated room count was an apparent increase in the cost of servicing guests. Expenses on a dollar-per-occupied room (POR) basis grew by 2.4 percent. This compares unfavorably to the budgeted increase in expenses POR of 1.8 percent. The 0.6 percent overage in budgeted expenses POR indicates that the costs and prices for labor, supplies, goods sold, and services were greater than expected.Unfortunately for hoteliers, controlling expense growth was not enough to overcome the revenue shortfall. With total revenue growing at 1.7 percent, and expenses rising 2.3 percent, profits at the hotels in the sample remained the same from 2016 to 2017. This is well short of the budgeted 5.0 percent growth rate for EBITDA. Limited AccuracyBoth the limited and full-service properties in our sample fell short of their respective budgeted revenue and profit goals. However, the deficiencies were greater for the limited-service hotels.With fewer employees, services, and amenities, limited-service hotel managers struggle to reduce expenses at their austere operations. With the limited-service aggregate occupancy level rising from of 77.2 percent in 2016 to 77.6 percent in 2017, there was not a lot of room for expense reductions. Accordingly, operating expenses for the limited-service properties increased by 3.1 percent despite an increase in revenue of just 1.1 percent. Considering limited-service hotels budgeted for a healthy 7.4 percent rise in profits during the year, the 2.3 percent decline in EBITDA from 2016 to 2017 was a big disappointment.Full-service properties also fell short of their budgeted profit growth in 2017. These hotels projected an EBITDA gain of 4.8 percent for the year. Unfortunately, the actual achieved gain was just a slight 0.2 percent. What To Budget for 2019According to the June 2018 edition of Hotel Horizons, CBRE Hotels' Americas Research is projecting that a 2.6 percent increase in RevPAR will lead to a 2.5 percent gain in total hotel revenues during 2019. Concurrently, operating expenses are forecast to rise by 1.9 percent, leading to an improvement in profits of roughly 3.5 percent.After two years of budget shortfalls, it will be natural for operators to be more conservative when preparing their estimates for 2019. Conversely, owners see record occupancy levels, and wonder why their operations are not capable of generating greater cash flows, thus putting upward pressure on expectations. It is hoped that these two opposing perspectives will settle on a budget that is close to reality.Robert Mandelbaum is Director of Research Information Services for CBRE Hotels' Americas Research. CBRE offers hotel managers several tools and reports to assist them in the preparation of their 2019 budgets. For more information, please visit pip.cbrehotels.com, or call (855) 223-1200. This article was published in the September 2018 edition of Lodging.

CBRE Hotels Outlook for 2019? Focus on Expenses

CBRE Hotels · 2 October 2018
CBRE Hotels' Americas Research Director of Information Services, Robert Mandelbaum, reviews our annualTrends In The Hotel Industry report, summarizing the performance of U.S. hotel revenues, expenses and profits. Robert discusses the challenges U.S. hotel operators faced in recent years, and what to expect as owners and operators prepare their budgets for 2019.

Ten Years Later: Has The U.S. Lodging Industry Really Recovered? | By Robert Mandelbaum and Keval Rama

CBRE Hotels ·20 September 2018
Lodging is a cyclical industry meaning that it passes over time through four distinct phases: peak, contraction, trough and expansion. Most industry participants believe that 2007 was the previous peak of the current business cycle following six years of expansion from the 2001 industry recession. According to STR, the demand for lodging increased for six consecutive years from 2002 through 2007, while average daily room rates (ADR) grew in excess of 4.5 percent during the latter four years. Per CBRE Hotels' Trends in the Hotel Industry survey, gross operating profits (GOP) were growing at a 10 percent annual pace leading up to 2007.After 2007, the industry went through a pronounced period of contraction. From 2007 to 2009 the national occupancy level dropped 13.2 percent, ADR fell 5.8 percent, and the average GOP per property decreased a staggering 29.4 percent. Clearly the trough of the current cycle occurred in 2009.The strong and extended period of expansion that the U.S. lodging industry has enjoyed since 2009 has been well documented. Lodging demand has increased each of the eight years from 2009 to 2017, enabling U.S. hotels to achieve new record levels of occupancy each of the past three years. After declining slightly in 2010, ADRs have also increased year-after-year through 2017, and are now up 28.8 percent from 2009. At the bottom-line, GOP is on an eight-year run of growth, and in 2017 was 73.4 percent greater than 2009 percent levels.Given such strong growth in the major industry metrics, can U.S. hotel owners and operators comfortably assume that their lodging assets have recovered?Has Recovery Occurred?In general, recovery is defined as the period in the cycle when the industry returns to levels of performance prior to the contraction period. Given the strong and extended period of expansion from 2009 to 2017, it has been assumed that the U.S. lodging industry has "recovered". However, depending on how you analyze the data, this may, or may not be the case.To determine which segments of the U.S. lodging industry may have recovered to 2007 peak levels of performance, we analyzed revenue, expense, and profit data from CBRE's Trends in the Hotel Industry database of hotel operating statements from thousands of properties across the nation. Same-store samples of data for six different property types were used to mitigate the bias created by changes in the profile of hotel products in the industry over the years. The data was analyzed using both nominal (stated-year) dollars, and real (inflation adjusted) 2017 dollars.Nominally - YesUsing nominal dollars, the average hotel in the Trends study sample achieved a total operating revenue level of $72,020 per available room (PAR) in 2017, 17.1 percent greater than the $61,525 PAR level achieved in 2007. Concurrently, GOP levels were $27,551 PAR in 2017, 19.8 percent more than 2007 profit levels. These data imply that on a nominal basis, U.S. hotels have "recovered". In fact, on average, the nominal recovery occurred in 2014 when the properties in the sample achieved revenue and profit levels superior to 2007 standards.Not all property types achieved nominal recovery at the same pace. Full-service, limited-service, and extended-stay hotels were able to exceed previous peak levels of revenue by 2013, while resorts, all-suite, and convention properties lagged until 2014. All property types surpassed 2007 GOP levels in 2014, except convention hotels which did not do so until 2015.From 2007 through 2017, limited-service and extended-stay hotels enjoyed the greatest nominal growth in total operating revenue of 23.4 and 22.0 percent, respectively. Unfortunately, these property categories were unable to translate the strong recovery on the top-line to the bottom-line. During the 10-year period, GOP levels grew by just 12.2 percent on a nominal basis at limited-service hotels and 20.4 percent at extended-stay properties. The majority of limited-service and extended-stay hotels in our sample are chain-affiliated. Therefore, with such strong revenue growth, it appears that the franchise-related costs (which are tied to changes in revenue) had the greatest influence on limiting flow-through at these two property categories.Resorts achieved the greatest nominal gain in GOP during the study period. They converted an 18.5 percent increase in revenue to a 26.0 percent gain in profits. Full-service and all-suite hotels also achieved GOP growth greater than revenue growth during the 10-year period. By reducing service levels at food and beverage outlets, combined with the relative ability to control labor costs (compared to limited-service and extended-stay hotels) operating efficiencies have been enhanced throughout these property types.Convention hotels have been lagging in both nominal revenue and profit growth. Operators at these hotels took advantage of the cost control measures previously mentioned, and limited operating expense growth to just 12.6 percent over the past 10 years. Unfortunately, convention hotels experienced the least growth in revenues (11.3%) and, therefore, GOP at these large properties are up just 9.0 percent on a nominal basis from 2007.Really - MaybeFor the owners and operators of U.S. hotels, the recovery story changes significantly when analyzing the 10-year trend in revenues and profits using real (inflation-adjusted) dollars. For this analysis, we converted the performance data to 2017 constant value dollars. Real changes in revenues and profits are significant to owners, operators and investors looking to achieve income and returns greater than the pace of inflation.Using real dollars, the average property in the Trends sample was still 0.6 percent behind the $72,455 PAR in total operating revenue achieved in 2007. Fortunately for hoteliers, operating expenses on a real dollar basis declined by 2.2 percent from 2007 levels, thus allowing for a slight 2.1 percent increase in GOP. Given this limited real gain in profits, it is not surprising that the average hotel in the Trends sample did not achieve real profit recovery until 2017.In terms of real revenue, limited-service (4.9%), resort (0.6%), all-suite (0.5%) and extended-stay (4.8%) hotels were the four property-types that were able to achieve real growth over the 10-year period. Full-service (-1.0%) and convention (-5.6%) properties have yet to return to the real revenue dollars achieved in 2007.Four out of the six property-type categories have also been able to provide their owners and investors with real growth in profits from 2007 through 2017. Resort hotels achieved the greatest gains in real profits (7.4%), followed by full-service (3.3%), and all-suite (3.3%) properties. Extended-stay hotels, which enjoyed a relatively strong real gain in revenue were only able to achieve a real growth in profits of 2.3 percent.Unfortunately for limited-service and convention hotels, the allusion of nominal gains in profits translated to real losses after accounting for inflation. In 2017, limited-service (-4.6%) and convention (-7.2%) hotels were still below their constant value 2007 GOP levels. Not So Real Over The Long-TermIf you were fortunate to enter the lodging industry after the 2009 industry recession, then you most likely have enjoyed the benefits of the significant and extended period of expansion. However, if you have been in the industry throughout the current cycle, then the revenues and profits that have been generated by your investment over the past 10 years may not have been as significant as the nominal changes suggest.

CBRE Hotels Canada Q2 Update

CBRE Hotels · 6 September 2018
CBRE Hotels Canada Q2 Update presents the highlights from the second quarter of 2018 relative to the 2018 Outlooks for the nation's major markets.

Budgeting for 2019? Follow the Supply and the Economy

CBRE Hotels ·22 August 2018
New hotel rooms coming onto the U.S. market shouldn't be a concern for established hotel operators because demand will continue to exceed moderating new-supply levels through 2019, according to CBRE Hotels' Americas Research's recently released September 2018 Hotel Horizons forecast report.CBRE Hotels Research forecasts that supply will peak at a 2.0 percent gain in 2018 and then stabilize at the long-run average of 1.9 percent for the next two years. Further, the number of projects entering all phases of the development pipeline is declining."On a broad national basis, the supply increases have been surpassed by lodging accommodation demand growth for the past eight years, and this trend is forecast to continue through 2019," said R. Mark Woodworth, senior managing director of CBRE Hotels' Americas Research. "However, when you look at the projected 2019 performance of the 60 major U.S. markets in our Hotel Horizons universe, you can clearly see the impact of new lodging supply at the local level."For 2019, CBRE is forecasting a very slight (0.02 percent) increase in the nation's occupancy level. Conversely, occupancy is forecast to decline in 47 of the 60 Horizons markets covered by CBRE. A primary difference among markets gaining occupancy and those losing it: anticipated levels of new supply. The 47 markets forecast to register declines in occupancy in 2019 will see an average 3.8 percent gain in supply from new rooms. The 13 anticipated to gain occupancy will see only 2.5 percent supply growth. "Not only does the change in supply affect the outlook for local market occupancy levels, but it impacts hoteliers pricing power, as well," Woodworth said, explaining that supply growth often leads to shrinking gains in pricing. For 2019, the 47 markets forecast to experience a decline in occupancy are projected to achieve an increase in average daily rate (ADR) of 2.1 percent. The ADR gain is expected to be larger - 2.5 percent - for the 13 markets forecast to see occupancy increases next year.Combining the expected changes in occupancy and ADR, the 2019 forecast RevPAR growth for the 47 occupancy declining markets is 1.2 percent, well short of the 2.9 percent RevPAR increase forecast for the 13 others.The ADR ParadoxWhile the trajectory of occupancy levels is pointing downward for the majority of markets, the occupancy levels still are forecast to be at, or near, all-time record highs. Unfortunately, despite the lofty occupancy levels, the changes in ADR for both the nation, as well as the 60 Horizons markets, are forecast to be below their respective long-run averages in 2019. "Economic theory would suggest that eight years of demand growth, leading to four consecutive years of record occupancy levels, should provide significant pricing leverage for hotel operators," 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. "Unfortunately, this has proven to be a paradox for hoteliers as our forecasts call for ADR growth levels to remain below the 3.0 percent long-run average for the foreseeable future."By definition, a paradox is contradictory or hard to explain, and that has been the case with the limited ADR growth. We have analyzed a variety of factors that appear to have impaired growth in ADR to varying degrees, but no single issue stands out as the dominant culprit. Once again, depending on the market, it could be any combination of supply growth, short-term rentals and other forces that encourage hotel managers to favor higher occupancies over higher room rates," Corgel said. "Further, given the continued rise in profits the past few years, we are examining the traditional notion that profit growth is higher when the mix of ADR and occupancy in the RevPAR calculation is overweighed in ADR."The Economy"The correlation between the health of the economy and the performance of the lodging industry has long been established. In fact, it is the positive outlook for the nation's economy in 2019 that explains our baseline forecast for continued growth in U.S. lodging demand," Woodworth said. "However, like any forecast, there is the potential for actual outcomes to vary from projections. Accordingly, we provide our clients with multiple lodging forecasts based on five different economic forecast scenarios."CBRE's baseline national economic forecast results in a projected1.9 percent increase in lodging demand, along with a 2.6 percent gain in ADR for 2019. Under CBRE's 'downside' economic scenario, the demand forecast changes to a decline of 0.6 percent and an ADR drop of 0.3 percent. However, should the economy improve beyond expectations, lodging demand could rise by 3.8 percent, with a 5.9 percent jump in ADR. "Some of the changes in our 60 Horizons market lodging forecasts vary to an even greater extent when you apply the local alternative economic scenarios," Corgel noted.Think Local"Now more than ever, it is important for owners and operators to understand their local hotel market conditions and economies when preparing their 2019 budgets. It is easy to be enthusiastically mesmerized by the positive outlook for the nationwide lodging market. However, don't be caught off guard by not understanding what is happening in your neighborhood. It is very evident that local economic conditions, as well as changes to the local lodging supply, are going to significantly impact the performance of U.S. hotels in 2019," Woodworth concluded.The September 2018 edition of Hotel Horizons 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.

Contract and Non-Management Employee Payrolls Rise In 2017

CBRE Hotels ·20 August 2018
As the pace of revenue growth continues to decelerate for U.S. hotels, the capability of hotel operators to control costs will determine the ability of a property to increase profits from year to year. According to the 2018 edition of Trends in the Hotel Industry, total operating revenue increased by just 2.0 percent in 2017 for the average hotel in the survey sample. Fortunately, by limiting the growth in operating expenses to 1.9 percent, managers at the Trends properties realized an increase in gross operating profits (GOP) for the year.Unlike 2016, it was non-labor related costs that were the primary driver of expense growth in 2017. Labor related costs accounted for just 48 percent of the expense growth from 2016 to 2017. This compares to 90 percent of the change from 2015 to 2016.Further, within the labor costs, it was the benefit component that drove the rise in this metric, as opposed to the payroll costs. In 2017, the combined total of payments made for salaries, wages, service charges, contract labor, and bonuses (payroll costs) increased by 1.8 percent. This is less than the 2.0 percent rise in payroll-related expenses (i.e. employee benefits). This is a reversal of the recent trend of payroll increases exceeding benefit growth.To examine how U.S. hotel controlled payroll costs in 2017, we examined the individual components of payroll. The CBRE Trends 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 Wages: ManagementService Charge DistributionContract, Leased, or Outsourced LaborBonuses and IncentivesA sixth sub-category is used by CBRE to track other compensation data that is not identified, but this totals just 0.6 percent of payroll costs.The following paragraphs summarize our analysis of the 2017 labor cost data from 4,512 properties in the Trends sample that provided detailed labor cost information in conformity with the 11th edition of the USALI. For the purposes of this analysis, we refer to the entirety of non-benefit compensation as "payroll."Payroll ComponentsThe salaries and wages paid to non-management personnel comprised 64.5 percent of payroll in 2017, followed by the salaries and wages paid to management (23.5%). The remaining 12.0 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 (56.4%), while management salary and wage payments were the most at extended-stay hotels (21.4%). Given the high incidence of mandatory gratuities, it is not surprising that service charge distributions made up the greatest percentage of payroll at resort (4.8%) and convention (4.4%) hotels. All-suite hotels allocated the greatest percent of their payroll dollars to contracted/leased employees (4.4%).The two property types that achieved the greatest gains in revenues and profits in 2017 appear to have rewarded their employees for these accomplishments. During the year resorts (2.9%) and all-suite hotels (2.8%) spent the greatest percentage of their payrolls on bonus and incentive payments.From 2016 to 2017, the payroll component that saw the greatest percentage increase was contract/leased labor (4.2%). As noted later in this article, the incidence of hotels using contract/leased labor also rose during the year. Elsewhere in payroll, service charge payouts increased by 1.5 percent, while bonuses and incentives grew by 1.1 percent.In 2017, the salaries and wages paid to non-management employees (2.9%) grew at a greater pace than the salaries paid to managers (1.3%). By combining Bureau of Labor Statistics data with the results of our Trends survey, it appears that the increase in occupancy did cause a need for greater hours among non-management personnel. To offset the rising cost of non-management payroll, it appears that increases to management salaries were limited.Incidence of ComponentsContract, Leased or Outsourced LaborThe 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 2017, 46.2 percent of the properties in the study sample reported payments made to contract/leased employees in at least one of their departments. This is an increase from 45.3 percent of properties in 2016.Given the difficulties hotels are having finding qualified employees, it is logical that the highest incidence of contact/leased employees was observed at the property types in need of the greatest number of employees. Resorts (73.0% of hotels) and convention hotels (62.7%) reported the highest percentages of payments made to contract/leased employees. On the other end of the spectrum, extended-stay hotels, with the lowest staffing requirements, reported the least incidence of payments to contact/leased employees (35.5%).Among all departments, the greatest use of contract/leased employees in 2017 occurred in the food and beverage department (32.2%) and rooms (32.2%) departments. Staffing levels in these departments vary with business volumes. Therefore, managers have found it more prudent to operate these areas "on demand" with temporary employees provided by staffing agencies.Service Charge DistributionOverall, the incidence of paying service charges grew from 17.6 percent of the sample in 2016 to 18.3 percent in 2017. Resorts (63.5% of hotels) with mandatory resort fees, and convention hotels (49.2%) with mandatory banquet charges, are the property types most likely to pay service charges to their employees. As expected, the distribution of service charges was most frequently observed in the food and beverage department (38.4%).Bonuses and IncentivesThe aggregate dollar amount of bonus payments increased by 1.1 percent from 2016 to 2017, while the number of hotels that paid bonuses during the year rose by 0.6 percent. On average, GOP at the 4,512 properties in the study sample grew by just 1.4 percent. The changes in bonus payments are commensurate with the lackluster improvement on the bottom line.Employees in the sales and marketing (94.1% of hotels) and administrative and general (76.7%) 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.Payroll PressureThe U.S. labor market is very tight, especially in the leisure and hospitality industry. According to the Bureau of Labor Statistics (BLS), the current level of open jobs in the sector equates to 5.3 percent of the total personnel currently employed. This is the highest level since 2000 and indicative of the difficulty hospitality managers are having finding qualified employees. Further, the tight labor market puts upward pressure on salary and wage rates.Not only is labor the largest single expense within a hotel, it has become the most difficult operational element to manage. The ability of operators to creatively find staff, satisfy employees, improve productivity, and continue to provide quality guest service will go a long way towards maintaining growth in profits.

Cost Controls Perpetuate U.S. Hotel Profit Growth In 2017 | By Robert Mandelbaum

CBRE Hotels ·17 July 2018
U.S. hoteliers enjoyed an eighth consecutive year of increasing profits in 2017 despite another slowdown in the rate of revenue growth. According to the 2018 edition of Trends in the Hotel Industry, total operating revenue increased by 2.0 percent in 2017 for the average hotel in its survey sample. Fortunately, by limiting the growth in operating expenses to 1.9 percent, managers at the Trends properties realized a 2.2 percent increase in gross operating profits (GOP) for the year.Trends in the Hotel Industry is the CBRE Hotels' Americas Research's annual survey of operating statements from thousands of hotels across the nation. The 2017 operating data collected for the 2018 survey was compiled in accordance with the 11th edition of the Uniform System of Accounts for the Lodging Industry.It is becoming increasingly difficult for U.S. hotels to achieve both revenue and profit gains. Within the 2018 Trends sample, only 59.1 percent of the properties enjoyed an increase in total operating revenue in 2017, while just 52.3 percent attained growth in profits. These are the lowest levels observed since the depths of the recession in 2009. Increasing competition from new supply, muted growth in average daily rates (ADR), and upward pressure on labor costs make the current operating environment one of the most challenging since the Trends survey started tracking industry performance in the 1930s.Efficient and ProductiveOver the years, U.S. hoteliers have been able to effectively respond to difficult operating conditions. By matching the 2.0 percent gain in revenue with a stingy 1.9 percent rise in expenses, the GOP margin for the Trends sample increased to 38.3 percent in 2017. This is the highest profit margin recorded by CBRE since 1960 and an indication of superlative operating efficiencies and productivity.U.S. hoteliers continue to effectively manage labor costs, the largest expense for hotels. The labor market is very tight, especially in the leisure and hospitality industry. According to the Bureau of Labor Statistics (BLS), the current level of open jobs in the sector equates to 5.3 percent of the total personnel currently employed. This is the highest level since 2000 and indicative of the difficulty hospitality managers are having finding qualified employees.The tight labor market has put upward pressure on industry wage rates. Per the BLS, the average hourly compensation rate for hospitality employees rose 3.8 percent in 2017. For the hotels in the Trends sample, total labor costs (salaries, wages, and benefits) increased by 1.8 percent. This implies a reduction in the number of hours worked. In addition to controlling the schedule, hotel managers gained greater productivity from their staff. With fewer hours, the employees at these same hotels serviced 0.4 percent more occupied rooms, as well as greater volumes of food and beverage revenue.Overhead ConcernsWhile labor costs continue to be controlled, an increase in non-labor related expenses was observed in 2017. During the year, labor costs increased by 1.8 percent, and all other costs rose by 2.0 percent. Some of the greatest increases were observed in the undistributed departments where in aggregate, expenses grew by 2.2 percent. Compared to the operated departments, undistributed costs are relatively fixed in nature and therefore less controllable by management.The most obvious cost increase among the undistributed departments during 2017 was utilities which grew by 1.4 percent. The 1.4 percent growth rate is not an alarming increase, but this is the first time since 2013 U.S. hoteliers have not benefited from a decline in utility costs.There were some non-labor related costs that rose more than revenue in 2017. These include technology related expenditures, franchise fees, credit card commissions, and the cost of complimentary food, beverage and services. Below GOP, management fees and property taxes also increased at a greater pace than the 2.0 percent growth in revenues.Property owners did find some solace in the 4.2 percent insurance costs decline in 2017. However, given the number of natural disasters that occurred during the year and the sluggish start to the stock market in 2018, we may see a boost in premiums this year. Moving PartsDuring 2017, operators of resort and convention hotels were the most efficient generating revenue flow-through to the bottom line. These two property types were the only ones to achieve GOP growth greater than revenue growth during the year. Resorts and convention hotels typically are large operations with extensive services, amenities, and labor requirements, therefore providing managers with more 'moving parts' to control.Conversely, limited-service hotels by design provide lesser amounts of amenities and services, and thus require fewer employees. Accordingly, managers at limited-service properties have fewer options for cost reductions, especially when operating at above long-run average occupancy levels. In 2017, limited-service hotels were the only property type to suffer a decline in GOP from 2016 levels.Can Profits Continue To Grow?According to the June 2018 edition of CBRE's Hotel Horizons forecast report, annual RevPAR gains for U.S. hotels are projected to range from 0.6 percent to 2.8 percent from 2018 through 2020. Given this rate of revenue expansion, can hotels continue to achieve profit growth? For hotels to achieve profit growth that keeps pace with inflation, expense growth must be limited to 2.9 percent or less over the next few years. Keeping in mind that the annual average expense growth rate since 1960 is 4.0 percent, this will be an enormous challenge.It is a very interesting period for hotel owners. On the one hand hotels are achieving record level profit margins, and therefore it can be assumed that owners and investor are currently receiving strong returns on their investments. On the other hand, while profit growth appears to be durable, owners like a "growth story". Slow growth in profits make the future story a little less exciting.Robert Mandelbaum is Director of Research Information Services for CBRE Hotels' Americas Research. To purchase a copy of the 2018 edition of Trends in the Hotel Industry report, please visit https://pip.cbrehotels.com/trends. This article was published in the June 2018 edition of Lodging.

CBRE June 2018 Lodging Insights Video

CBRE Hotels ·20 June 2018
Mark Woodworth and Jack Corgel discuss our updated Hotel Horizons forecasts and the reasons for the recent upward revisions. Jack explains why luxury hotels are now expected to have the highest RevPAR growth among the chain scales in 2018 and Mark gives a quick update on new construction activity.

Brisbane's first luxury hotel openings in 20-years signal market renaissance

CBRE Hotels ·14 June 2018
The completion of a raft of hotels will redefine the Brisbane market in the next 12 months, providing the city's first new luxury properties in two decades.Research from CBRE Hotels highlights that over 80% of the city's new supply in the next 12 months will be in the luxury sector - catering to a new breed of travelers, including millennials and Asian tourists seeking out luxury hotels and boutique properties.CBRE Hotels' National Director Wayne Bunz said new openings this month in Brisbane included the W Brisbane (a 312 room, 5-star hotel) and the Novotel South Brisbane (a 238 room, 4-star hotel) with a further five properties due to open over the next six months."Brisbane is no longer going to be the poor cousin to Sydney and Melbourne," Mr Bunz said, noting that the new wave of construction was focused on lifestyle and 'designer' hotels that appealed to individual needs and were taking luxury to new levels."Gone are the days of the cookie cutter approach to hotels, with these new properties catering to travelers seeking local experiences and eye catching designs."Mr Bunz added that the openings would provide strong, long-term benefits for Brisbane, although he noted that an ongoing challenge for hotel management companies would be to maintain rate integrity in the face of ongoing competition from Airbnb.The openings of the W Brisbane and the Novotel South Brisbane will be the prelude for the following launches:Emporium Southpoint - 143 room 5-star hotel opening July 2018Adina George Street - 220 room 4.5-star hotel opening July 2018Westin Brisbane - 286 room 5-star hotel opening August 2018Calile Hotel James Street - 175 room 5-star hotel opening September 2018Art Series Howard Smith Wharves - 164 room 5-star hotel opening January 2019CBRE Hotels' Senior Negotiator Hayley Manvell said the new hotels being launched each had their own unique characteristics and demand generators, either being part of a major mixed use development such as the W in the Brisbane Quarter complex or a very strong location with a key demand generator such as convention centre, airport or casino - examples being the Novotel at South Brisbane and the Calile in the James Street precinct.Mr Bunz added; "We are also eagerly watching the refurbishment and rebranding of 'The Valley by Ovolo', previously the Emporium Fortitude Valley, which will be making a splash in the market along with their Ovolo Inchcolm hotel".CFO & COO of the Ovolo Group, Dave Baswal, said; "Luxury & lifestyle hotels are a timely addition to Brisbane market and will help attract further business and leisure clientele to the city. Ovolo Inchcolm is already showing growth Y-O-Y and is on track to become market leader in lifestyle space. We expect Brisbane market to stabilise this year and start improving from 2019."The new supply coincides with counter-cyclical investment activity in the Brisbane hotel market, with CBRE Hotels having recently sold the Emporium Fortitude Valley and Ibis and Mercure Brisbane for sub 5% and 6% yields respectively."While Sydney and Melbourne are still the most sought after investment locations, limited availability is leading investors to widen their scope and consider other locations," Mr Bunz said."Astute investors are looking for value in recovering hotel markets such as Perth and Brisbane, where new supply has dampened investor appetite. History shows that strong capital gains can be made in these markets for investors who did not simply follow the herd."CBRE Hotels' Queensland Director of Valuations Jacqui Reiser added; "We expect the quality of the hotels coming into the market will assist in driving demand across all market sectors, with room rates forecast to increase due to the high standard of accommodation. STR Results reflect a positive return to RevPAR growth for the Brisbane market, which is expected to continue to strengthen."The new hotel supply coincides with an overall building boom in the Brisbane CBD, with $35 billion in major development and infrastructure projects reshaping the city skyline. Major projects include:$5.4bn Cross River Rail project$3bn Queens Wharf Casino and entertainment precinct$2bn Brisbane Live Entertainment Centre$1.7bn Airport expansion to double airport arrivals over the next 10 years$1.4bn Eagle Street Pier Waterfront redevelopment by Dexus$1bn Brisbane Quarter mixed use complex$940m Brisbane Metro $240m Mega Cruise Ship Terminal$110 million Howard Smith Wharves' redevelopment. For Australian/international news or global stories, follow us on Twitter: @cbreAustralia
Article by Robert Mandelbaum

Extended-Stay Hotels Growth or Performance?

CBRE Hotels ·12 June 2018
When analyzing the performance of the extended-stay hotel segment, we see a difference in the performance of the upper-priced properties in this segment versus the moderate-priced properties. Since 2010, moderate-priced extended-stay hotels have shown greater gains in revenues and profits. However, upper-priced extended-stay hotels continue to achieve premiums in occupancy, ADR, revenues, and profits.To evaluate the performance of extended-stay hotels in the U.S. we analyzed operating data for a sample of 360 upper- and moderate-priced properties that submitted data each year from 2010 through 2017 to CBRE's annual Trends in the Hotel Industry survey. For this analysis, the upper-priced sample consisted of hotels affiliated with extended-stay brands in the upscale segment. Moderate-priced extended-stay hotels are affiliated with brands in the upper-midscale and midscale segments. Economy extended-stay hotels were excluded from this analysis to avoid a significant bias in the sample. Estimates of 2017 performance (2017E) were made based on the preliminary results of our 2018 Trends survey.The following paragraphs summarize the findings of our analysis.Extended vs AllIn aggregate, the properties in the extended-stay sample achieved compound annual growth rates (CAGR) of 4.8 percent in total operating revenue and 6.3 percent in gross operating profits (GOP) from 2010 through 2017E. While strong, these growth rates are less than the 4.9 percent CAGR in revenue and 7.3 percent CAGR in profits achieved by the entire Trends survey sample inclusive of all property types.During the depths of the 2009 industry recession, extended-stay hotels suffered significant double-digit declines in revenues and profits, but not to the same extent as the overall U.S. lodging industry. This helps to partially explain the relatively lower growth rates in performance for the extended-stay sample, compared to all U.S. hotels during the study period.Despite the slower historical growth rates, it is estimated that the extended-stay sample will continue to achieve significant premiums in both occupancy and profit margins compared to the overall Trends sample. By capturing demand for five or more days, not only are occupancy premiums achieved, but so too are operational efficiencies. Fewer check-ins and check-outs, limited levels of housekeeping services, and a lack of retail food and beverage all lead to the 50.1 percent GOP margin estimated for the extended-stay hotel sample in 2017.Comparative ChangesJust as we observed differences between the historical performance of extended-stay hotels versus all other property types, we have also seen operating differences between upper-priced and moderate-priced extended-stay hotels.Compared to upper-priced extended-stay hotels, the moderate-priced extended-stay sample has achieved greater CAGR gains in all major hotel performance metrics since 2010. Greater revenue growth (6.5% CAGR) led to superior increases in profits (9.5% CAGR) at the moderate-priced properties compared to the upper-priced properties. The bulk of the enhanced revenue and profit growth occurred during 2013 and 2014 when occupancy levels at the moderate-priced properties grew by a combined 15.8 percent.Also contributing to the superior profit growth for the moderate-priced properties was greater control over expenses. From 2010 to 2017E, labor costs per-occupied-room at the moderate-priced sample grew by a CAGR of 1.7 percent compared to 2.6 percent for the upper-priced sample. Moderate-priced extended-stay hotels operate on very limited staffing levels, and typically offer housekeeping services just once a week. Being mostly fixed in nature, labor costs at the moderate-priced extended-stay hotels do not necessarily react in sync with fluctuations in occupancy.Premium PerformanceWhile the moderate-priced properties have experienced greater performance growth rates over the past seven years, the upper-priced extended-stay hotels are estimated to have achieved operating premiums in 2017. During the year occupancy for the upper-priced sample is estimated to have been 80.9 percent. This is greater than the estimated 78.6 percent annual occupancy rate for the moderate-priced sample.By achieving a 62 percent premium in ADR ($146.84 vs $90.56), the upper-priced properties in the sample were enabled to achieve a 69 premium in total operating revenue per-available-room (PAR) during 2017E. The greater dollars in revenue also led to a 72.9 percent enhancement in GOP PAR ($22,408 vs $12,959).Accounting for the inherent differences in dollars PAR, upper-priced extended-stay hotels also achieved a premium in profit margin. In 2017E, the upper-priced sample achieved an estimated GOP margin of 50.3 percent of total operating revenue. This compares favorably to the 49.2 percent GOP margin at the moderate-priced properties. While staffing levels are lower at the moderate-priced properties, the higher revenue levels at the upper-priced properties covers the greater labor costs and results in a labor cost ratio 0.5 percent less than the moderate-priced sample.Healthy FutureIn the March 2018 edition of Hotel Horizons, CBRE is forecasting the demand for U.S. hotels to increase by approximately 2.0 percent each year through 2022. This implies that economic indicators such as income and employment will continue to remain healthy and generate lodging demand. Given the corporate orientation of most extended-stay demand, this bodes well for the extended-stay lodging segment.

After Strong First Quarter CBRE Lifts 2018 U.S. Lodging Forecast

CBRE Hotels ·30 May 2018
"We continue to be impressed by the ability of the U.S. economy to support demand growth for accommodations away from home," said R. Mark Woodworth, senior managing director of CBRE Hotels' Americas Research. "Helped by an expanding economy, first quarter 2018 lodging demand grew at 3.0 percent, a full 1.1 percentage points greater than anticipated. This sustains 33 consecutive quarters of demand growth, a streak that started in the first quarter of 2010."Given the strong first quarter performance, CBRE's 2018 annual forecast for growth in lodging demand has increased from 1.8 percent in its March forecast report to 2.1 percent in the June edition. With the nation's lodging supply forecast to grow by 2.0 percent, this now flips the occupancy projection from a 0.1 percent decline to an increase of 0.1 percent. "Looking toward 2019, we foresee another year of occupancy growth. This will mark 10 consecutive years of increases in occupancy and five consecutive years of record occupancy levels," Woodworth noted. "With sustained record occupancy levels, we also are starting to see the return of some pricing power for U.S. hoteliers," 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. "Ever since the U.S. lodging industry achieved a new all-time high occupancy level in 2015, we have observed a slowdown in the pace of annual changes in average daily room rates (ADR). This is counterintuitive to basic economic principles. However, based on the strong performance observed during the first quarter of 2018, we are forecasting a 2.7 percent annual increase in ADR for 2018. This is greater than the 2.1 percent annual change in ADR during 2017."The Hurricane FactorThe impacts of hurricanes Harvey and Irma that hit Texas and Florida during late summer 2017 impacted year-over-year changes in U.S. hotel performance. As noted before, lodging demand increased during the first quarter of 2018 at a pace of 3.0 percent. Yet by years end, CBRE is forecasting the annual increase to be just 2.1 percent. "As a result of the hurricanes, we saw a 3.7 percent increase in demand during the fourth quarter of 2017. This was generated by displaced citizens in need of shelter, as well as rescue workers, remediation crews and insurance adjusters in need of lodging. Barring another unforeseen significant event, we do not believe this level of demand growth can be sustained in the fourth quarter of 2018. That, combined with the high occupancy levels traditionally achieved during the summer months, puts a seasonal cap on the potential for demand growth during the last three quarters of the year," Corgel observed. Impact from the 2017 hurricanes also can be seen in the 2018 forecasted performance of individual markets. However, the impact will be different between Texas and Florida. For 2018, CBRE is forecasting declines in both occupancy and ADR for hotels in the Houston lodging market. Conversely, four Florida markets (West Palm Beach, Miami, Orlando and Jacksonville) are projected to achieve the greatest annual increases in ADR among the 60 markets in the Hotel Horizons universe."In general, the supply of available hotel rooms in the Houston market was less impacted by Hurricane Harvey, compared to Florida where Hurricane Irma caused a number of properties to remain closed through the first quarter of 2018. Therefore, in Houston, the occupancy and ADR boost received in 2017 will not be matched in 2018. Conversely, the lingering closure of hotels in Florida has helped sustain the hurricane-related occupancy and ADR increases into the 2018 first quarter busy season. This will have a positive impact on their annual performance," Woodworth said."We are bullish on the performance of U.S. hotels during 2018 and the depth of the fundamentals supporting our forecast. The continual achievement of record occupancy levels, combined with improved ADR growth, should provide all industry participants with a sense of comfort. The magnitude of revenue and profit growth may not be spectacular, but it appears to be very sustainable," Woodworth concluded.The June 2018 edition of Hotel Horizons for the U.S. lodging industry and 60 major markets can be purchased by visiting: https://pip.cbrehotels.com

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