Like other industries, profits in the hotel business are achieved when revenues exceed the cost of operations. In 2015, there are several factors that will enhance the ability of hotel managers to control their operating expenses:
“According to Moody’s Analytics, the pace of inflation is forecast to be a mere 0.6 percent. This will help curb the growth in the cost of the goods and services purchased by hotels, including utilities.
In the March 2015 edition of Hotel Horizons®, PKF Hospitality Research (PKF-HR), a CBRE Company, is forecasting occupancy to increase by 1.9 percent in 2015. This is less than that 3.6 percent pace of occupancy growth reported STR, Inc. in 2014. A deceleration in the increase of occupied rooms leads to a slowdown in the growth of variable expenses.
While the national unemployment rate is declining, wage rates are still projected to grow at a relatively modest pace.”
Therefore, with the expense side of the profit equation seemingly under control, what bottom-line contribution can hotel owners and operators expect from their top-line revenues?
Strong RevPAR Growth
As reported in the March 2015 edition of Hotel Horizons®, the growth in the demand for lodging accommodations in the U.S. will exceed the change in supply through 2016. For this year, rooms revenue per available room (RevPAR) is projected to increase by a very strong 7.3 percent. This is nearly twice the long-run average annual RevPAR growth rate of 3.2 percent as reported by STR, Inc.
The 7.3 percent RevPAR growth rate is the result of a forecast 1.9 percent increase in occupancy combined with a 5.3 percent rise in average daily rate (ADR). Therefore, 74 percent of the increase in RevPAR for the average U.S. hotel will be attributable to the rise in ADR.
To examine how the composition of the forecast RevPAR growth for 2015 will influence the change in net operating income (NOI) for U.S. hotels, we have analyzed the relationship between changes in RevPAR and NOI during 2013. The year 2013 was chosen because hotels operated in economic conditions similar to what is projected for 2015, and the composition of RevPAR change for the overall U.S. lodging industry that year was 76 percent driven by the change in ADR.
The data for our analysis came from a sample of 3,867 operating statements for the year 2013 pulled from PKF-HR’s Trends® in the Hotel Industry database. For the purpose of this analysis, NOI is defined as income before deductions for capital reserve, rent, interest, income taxes, depreciation, and amortization.
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