Rising expenses and flagging performance metrics are likely to be driving forces for the U.S. hotel industry as it enters the next decade.
2019 is almost at an end. It has been another year of mostly “positive” revenue-per-available-room growth; another year to add to the longest bull run in the hospitality industry. So I thought it would be a good time to talk some numbers and look underneath the hood, so to speak, to understand where we stand.
Occupancy growth has flat-lined with 17 of the top 25 U.S. markets in decline. Of these, nine also show a decline in average daily rate.
Real ADR growth (factoring in inflation rate) has turned negative, down 0.5% for 2019 as of June, according to 12-month running data from STR and the Consumer Price Index. STR is the parent company of Hotel News Now.
In the current cycle, weekend occupancy has grown faster (+4.1%) than weekday occupancy (+2.5%). Weekend ADR as well continued to maintain its $2 premium over weekday ADR.
Short-term rentals continue to gain market share. As of 2018, short term rentals accounted for 13% of all global lodging spend, up from 8% in 2013. This number is projected to increase to 16% by 2023 at a compound annual growth rate of 11%. Branded players currently account for 0.5% of total short-term rental supply, but hotel supply nonetheless dominates short-term rental listings in major markets, with short-term rental listings making up less than 30% of total supply in major MSAs. In addition, true hotel comparable short-term rentals make up less than 25% of total listings.
Compression nights are becoming rarer, as compression ADR premiums also show a downward trend. This trend will continue given the increasing presence of short-term rentals which generate a higher occupancy (81.6%) during compressions nights versus all other nights (63.5%).
But food-and-beverage revenue continues to grow with total F&B RevPOR (revenue per occupied room) up 2.6% year over year, and on average up 2.4% per annum since 2017.
Miscellaneous income saw the biggest gain in 2018 with a growth of 11.3% year over year, largely due to the rise in destination fees, which have increased 25% since 2014.
Profitability is at its peak, but margins are declining as rising wages and low unemployment, coupled with protectionist sentiment towards immigrant labor, puts pressure on margins. For the past three years, labor costs have outpaced revenue growth.
Labor costs increased 3.9% year over year for full-service hotels and 5.1% for limited-service hotels, with benefits driving more than half of that increase.
On the chain scale side, midscale/economy hotels had the highest growth in labor cost (+6.7%) while upper-upscale and upper-midscale hotels had the lowest growth (+3.7%).
Overall, labor expense growth (+4%) outpaced revenue growth (+2.9%), with 41.2% of the markets experiencing house profit declines. In contrast, just five years ago only 13% of the markets experienced house profit declines.
Hotel rooms under construction totaled 206,000 as of June 2019 (3.8% of existing supply), still below the previous peak of 211,700 rooms (4.7% of existing supply) in December 2007, according to data from STR. In addition, average project size under construction in 2019 is 118 rooms versus 150 rooms in 2007, with only 47 projects of 500 rooms and more currently under construction versus 155 such projects in 2007. Overall, the U.S. pipeline has grown 8.4% year over year, with 62% of the pipeline under construction in the limited-service sector and 34% of total rooms in final planning stages.
What does this mean?
I’ve said this before, and it’s worth mentioning again–the hospitality industry is under the influence of an evolutionary shift with increased emphasis on emotional resonance, from convenience to book to personalization in travel. This along with slowing and stagnant occupancy and ADR growth, and an increased expense pressure on the bottom line, will make for a very interesting 2020 and beyond.
At Dream Hotel Group, we expect the expense side to become the driving factor in bottom-line performance as we enter the stagnant phase of the lodging cycle and new development starts to make more meaningful inroads into existing properties in the market. To further that, as we are all well aware, the hotel industry is an extremely people-intensive business and labor is the biggest (32%) and the fastest growing expense in the hotel industry.
Having a clear strategic plan that identifies the requirements and expectations from our team members at the property is paramount as we shift from a top line to a bottom line source of growth while providing the team with the necessary feedback, guidance and resources to succeed and match up to those requirements and expectations.
Karan Narang is the Vice President for Acquisitions and Development Analysis at Dream Hotel Group, playing an integral role in the continued growth strategy and expansion of group. Karan holds a Master of Management with specialization in Hospitality Real Estate Finance & Investments, from Cornell University; Bachelor of Science in Hotel Restaurant & Institutional Management, from the University of Delaware and a Higher Diploma in Hospitality Management, from the Swiss School of Tourism & Hospitality, Switzerland. Dream Hotel Group is a hotel brand and management company with a rich, 30-year history of managing properties in some of the world’s most highly competitive hotel environments. Home to its Dream Hotels, Time Hotels, The Chatwal and Unscripted Hotels brands, Dream Hotel Group encompasses three business lines: Proprietary Brands, Hotel Management and Dining & Nightlife.
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