The hotel industry continues to grow at an unprecedented rate. The latest figures from the UNWTO show international arrivals growing 6% in 2018 to total 1.4 billion.
More people want to travel. And more investors and owners are entering the mix, hoping to turn a profit through hotel ownership and operation.
This is great news – or is it? Increased demand means that hotel occupancy rates should rise, but how many hotels are managing to convert this into increased profit?
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The US hotel industry is forecast to enjoy a 10th consecutive year of growth in 2019, according to data from CBRE Hotels Americas Research. The firm has predicted that hotel occupancy in the US will rise to 66.2% in 2019 – a fifth straight record level. That occupancy will be driven by a 2.1% increase in demand, although this will be somewhat rebalanced with a 1.9% increase in hotel supply.
How Will This Translate Into Profit?
Looking at current figures, it won’t necessarily. The profitability outlook for 2019 is bleak. Revenue will continue to grow, but only because demand will remain strong.
CBRE forecasts that there will be a modest growth of between 2% and 3% in rooms revenue in the US market in 2019. But this will be offset by increases in cost, leading to flat or even declining gross operating profit for 2019.
“What we’re seeing is O.K. revenue growth because demand increases have kept pace with supply increases at the macro level, but we’re seeing weak average daily rate growth. The significant increased cost of labor is resulting in very, very modest to nominal profit growth on the bottom line,” says Mark Woodworth, Senior Managing Director, CBRE Hotels Americas Research.
HotStats has also reported a rise in labor costs. According to their data, rooms labor costs on a per-occupied-room basis are up around 4%.
“In the US, low unemployment and wage growth are conspiring to create a war on talent. This is a challenge that will spill over into 2019 and compel hoteliers to be even more vigilant and focused on the bottom line to ensure profitability,” says Pablo Alonso, CEO of HotStats.
“In addition, the ability to drive rate will factor into profitability. If ADR percentage growth is at or below the rate of inflation, it will be difficult for hoteliers to drive higher profitability. In Europe, uncertainty still around a Brexit plan could negatively impact corporate travel, which could, in turn, be a huge gap that hotels will have to fill.”
In Europe, rising labor costs are also proving a challenge, as Thomas Emanuel, Director of Business Development at STR explains: “It is impossible to look at Europe as a whole because each country and market is so different. To use a handful of examples: London, and the U.K. in general, will have to look at labor costs, particularly post-Brexit with changes to freedom of movement. The weakening of the Pound Sterling has also had an impact on the cost of imports. Paris struggles with labor costs, which in 2017 were 42% of total sales, the highest of the major markets we track across Europe.”
Demand Up But Rate Growth Lags
The latest data from STR corroborates the situation laid out by CBRE, showing that in the US demand is at an all-time high, but rate growth still lags. Hotels in the US recently saw 100 months of consecutive RevPAR growth, yet ADR growth remains somewhat stagnant, in line with the rate of inflation.
The story is the same in Europe. Again, demand is at an all-time high. According to the latest UNWTO figures, demand for Europe is currently growing at a rate of 6%. Yet rate growth remains depressed.
The latest data from STR on the European market shows that the region has struggled to regain pricing power since the global economic recession in 2007. Yet prior to 2008, ADR growth led demand growth.
The danger is if hotels become complacent and decide to settle for this status quo of small gains. If ADR continues to grow at the rate of inflation while demand growth is good, what happens once demand declines? As evidenced by past recessions, ADR will quickly plummet.
With demand up, 2019 should be the year in which hotels dig deep and prosper. Jan Freitag, Senior VP at STR, sums it up: “Hotel rooms are too cheap. Despite the demand records we report on every month, hoteliers are just not comfortable taking advantage of the environment. But if not in 2019, then when?”