Hotels Still in the Sweet Spot for Growth

April 29 2014 | Latest News

By Paul Bubny | National

Hotel profits will exceed those of 2007 this year, says PKF's Woodworth.

ATLANTA—The lodging sector’s multi-year run of double-digit annual NOI gains isn’t over yet. That streak will continue through the end of 2015, PKF Hospitality Research says in the latest edition of its annual Trends in the Hotel Industry report.

“By 2014, the average hotel in our Trends sample will finally achieve bottom-line profits greater than their pre-recession peak on a nominal basis,” says R. Mark Woodworth, Atlanta-based president of PKF-HF, a subsidiary of Colliers International. Perhaps more important is that hotel profits, in inflation-adjusted terms, “will exceed 2007 levels in 2015.”

The firm is forecasting unit-level NOI increases of 12.4% in 2014, and another 14.2% percent in ‘15. The hotel sector has maintained annual profit growth of greater than 10% each year since 2011, the longest unbroken streak since the 1970s.

That five-year streak was maintained last year, albeit just barely, despite a slowdown in the pace of RevPAR increase. Woodworth chalks up that 10.1% NOI growth to a 5.4% gain in total hotel revenue, along with a 3.7% increase in operating expenses.

“An accumulation of market, operational and economic factors has resulted in a business environment that is very conducive to increases of both the top-line and bottom-line,” he says. “We are in the middle of the sweet spot in the business cycle for hotel profits.”

The growth streak has continued since 2011.

All property types within the hotel sector enjoyed an increase in profits during 2013, although not all saw double-digit gains, according to PKF-HR. Resort hotels fared best at 11.9%, followed by full-service properties at 11.5%. Lagging the average were limited-service hotels at 6.8%, suite hotels with food and beverage at 6.8% and suite hotels without food and beverage at 7.9%.

Convention hotels achieved profit growth of 8.2% last year. “While this was less than the overall sample average, it is greater than the profit growth these properties achieved in 2012,” Woodworth says. “The increased profitability of convention hotels is consistent with the initial stages of the recovery of the group demand segment” observed by PKF-HR, he adds.

Along with profits come expenses, of course, and for ’13, hotels’ operated department costs increased by 3.9%, while undistributed expenses rose by just 3.1%. “Clearly the lodging industry is at a point when business volume is covering most of the fixed undistributed expenses, while continued occupancy growth is driving the variable departmental costs,” comments Woodworth.

According to Moody’s Analytics, PKF-HR’s source for economic forecast data, the nation’s unemployment levels will remain above 5.5% for the next few years, while inflation is expected to hover below 2.5%. “These two macroeconomic factors will help suppress the increases in the less-controllable fixed component of hotel operating expenses,” says John B. Corgel, the Robert C. Baker professor of real estate at the Cornell University School of Hotel Administration and senior advisor to PKF-HR. “The unemployment rate will temper the need to raise salaries and wages, while low inflation will moderate increases in most of the goods and services purchased by hotels.”