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    Hoteliers will need to focus on the ‘bottom line’ in 2018 as labor costs increase

    By Russ Rivard

    Released January minutes from the Federal Reserve show an economy that is heating up at a time when the nation is believed to be at virtual full employment. This tight labor market, along with increases in wages, will result in higher annual inflation. There is common ground among many that that the Fed will continue to increase interest rates; however, can hoteliers’ growth in revenue per available room (RevPAR) outpace inflation? Well, so far, so good. The nationwide average daily rate (ADR), including all chains and classes of hotels, for year-to-date January 2018 point to continued improvement in hotel revenue growth. According to the STR Lodging Outlook, nationwide ADR increased from $120.93, registered in January 2017, to $123.33, recorded in January 2018. Nationwide RevPAR has also increased annually from $65.29 to $67.17. This improved performance could point to increasing hotel values. However, this growth in RevPAR may not be enough to offset pressure on bottom-line net operating income (NOI) because of increases in labor costs. Hotel values can also be affected adversely because, as interest rates rise, cap rates also rise to compensate investors for the risk premium they demand to invest in equity versus debt. Discount rates, used to calculate internal rates of return, also rise. In short, values might decline in a rising interest-rate environment.

  • Although the information above points to a potential challenge of whether hotel values will increase or decrease in 2018, hoteliers are expected to continue to see improving bottom lines due to the strong demand for leisure travel as households benefit from additional money in their pockets, otherwise known as disposable income. This extra income will be generated from wage growth and tax benefits realized from recent changes to the US tax code. As we know, the hotel business depends largely on leisure travelers, and hoteliers should continue to benefit from this leisure demand. Just as important, hotel operators can raise rates to overcome the higher expenses caused by increased wages.

    So, which is it? Are recent upticks in price levels good or bad for hotel operators and investors? After years of minimal inflation, the U.S. economy is anticipated to continue to heat up in the near term; thus, wage pressures are likely to be part of the new normal. If demand stays strong and new supply additions remain reasonable, there is a window of opportunity for U.S. hotel operators. And despite this window closing slowly, hoteliers should expect another good year for 2018, as long as the Federal Reserve continues with the anticipated, yet minimal, interest-rate adjustments.