Experts shared insights on the state of the hotel industry during the most recent meeting of the Hospitality Asset Management Association.
IRVINE, California— Robert Mandelbaum, director of research services for CBRE Hotels, said he and his company remain optimistic about the prospects of the hotel industry, although challenges lie ahead.
Speaking at the recent meeting of the Hospitality Asset Managers Association, Mandelbaum and Stephen O’Connor, principal at RobertDouglas, shared some of their insights on the state of the hotel industry. Here are some key takeaways from those presentations.
1. Rooms revenue rules, but costs catching up
Mandelbaum said while food-and-beverage revenues seem to be growing at a faster pace, “rooms are still the primary driver of revenue.” Overall, that’s a good sign, he said, but what’s worrisome is less and less of that rooms revenue is flowing through to the bottom line.
“We’ve actually struggled (with profitability) as costs grow faster than rooms revenue,” he said.
He said some of the top costs hoteliers need to keep an eye on are salaries, laundry and commissions.
2. Bars looking strong
A lot of the discussion around F&B revolves around room service, which Mandelbaum admitted has struggled lately. Meanwhile, he said, banquet and “venue” (read: bars) revenues are growing significantly. He said the profitability of F&B operations is also looking good.
“Food departments benefit from the costs of foods declining over the past year,” he said. “You can see costs at grocery stores continue to decline.”
Mandelbaum said it will be important to keep track of whether food costs continue to trend down in 2017, especially in light of the recent natural disasters, which could potentially cause a spike in food and energy prices.
3. There’s space for meeting space
O’Connor noted there isn’t much development going on across the U.S. right now focused on large luxury properties that feature significant meeting space. He said this could be due partially to regional banks, which are representing a considerable amount of available lending, preferring select-service properties.
He noted this could represent an opportunity for some developers.
“There will always be a demand for large group spaces,” he said.
4. Black swans don’t become more likely
O’Connor acknowledged the fact that many people seem to be counting the days until the end of the current lodging cycle, but he said that line of thinking might be overly simplistic. He said cycles are ended by large, economy-shaking events (commonly referred to as a “black swans”), rather than by any perceived time limit. The length of past cycles, he added, has no bearing on how likely such events, which by definition come from outside the industry, will occur.
“There’s no greater likelihood for (a black swan event) tomorrow than in a year or two or three,” he said.
But he noted pessimism isn’t necessarily a bad thing for the industry as concerns have the effect of moderating the availability of debt and restricting supply growth.
5. The stars could be aligning against the hotel industry
While he wasn’t predicting a black swan event, O’Connor noted if something bad were to happen, things could snowball quickly for the hotel industry at this point. He said the industry has benefited from years of positive factors, including low interest rates, declining unemployment, increased asset values and increased efficiency and profitability. And now, he said, the conditions are right for many of those things to turn all at once in the event of a black swan.
“My concerns are what happens if the pendulum flows the other way,” he said. “We very well could see a vicious cycle, with these trends piling upon themselves. When the market moves against you in an almost coordinated manner … the effects could compound upon themselves, and things can be very destructive on value fairly quickly.”