Hotel Operators Adapt and Survive in 2020

Faced with the greatest declines in revenue since the 1930s, U.S. hotel operators in 2020 have demonstrated their historical ability to adapt to difficult market environments and squeeze the greatest efficiencies from their operations. Through the first six months of 2020, U.S. hotels are on track to achieve profit margins better than those observed at past comparable levels of depressed occupancy.

CBRE collected June 2020 operating statements from a sample of approximately 450 diverse hotels across the country. For the sample, the year-to-date gross operating profit (GOP) margin was 18.2 percent. This was achieved at an occupancy level of 36.6 percent. Based on CBRE's August 2020 forecast for the entirety of 2020, U.S. hotel occupancy is projected to be 39.8 percent. Using information from CBRE's Trends® in the Hotel Industry database, at 39.8 percent, hotels have historically averaged a GOP margin of 11.6 percent.

Of course, the greater levels of operating efficiency do not provide enough joy to overcome the pain of an average 79.1 percent year-over-year decline in GOP. Further, for the owner, earnings before interest, taxes, depreciation and amortization (EBITDA) is down 103 percent, implying a negative cash flow before debt service.

What the greater than expected GOP margin does reveal is the extent to which hotel managers have adjusted their operations and demonstrated the ability to control the variable costs for which they have the greatest influence.

From the first half of 2019 to the first half of 2020, operating expenses through GOP have declined by 41.2 percent on a per-available-room (PAR) basis. The 49.7 percent decline in occupancy for the sample did contribute to this decline. However, measured on a per-occupied-room (POR) basis, operating expenses rose 16.8 percent.

When analyzing the cost data for the operated departments versus the undistributed departments, the impact of fixed expenses becomes evident. Within the operated departments, expenses PAR declined by 47.5 percent, but increased just 4.3 percent POR. It was a different story in the undistributed departments where expenses declined by 32.6 percent PAR, but rose a strong 33.8 percent POR. This typifies the fixed nature of most costs within the undistributed departments.

CBRE projects lodging performance to improve during the second half of 2020. As occupancy levels increase, managers will be challenged to continue to suppress operating expenses. However, as we have observed during the first six months of 2020, as well as during the past two recessions, cost control measures have tended to linger after periods of depressed performance. Lessons have been learned during difficult times.