This may be another tough year for hotels. Profit margins are declining, as both operating and ownership expenses increase at a greater pace than revenues, according to CBRE’s latest investment performance forecast for the hospitality industry in 2025.
The report from the world’s largest commercial real estate services and investment company found that sluggish projections of revenue growth and fears of inflation are weighing on the hospitality sector. The financial headwinds for hotels also include a slowdown in foreign travelers visiting the U.S., higher costs for most aspects of hotel service and competition from other lodging options.
Revenue growth for all types of hotels was positive in March, but the pace of growth was slowing. The growth in revenue per available room, a popular way to measure hotel-room profitability, was just 0.8% in March.
Another developing problem is that the number of inbound international visitors fell 11.6% in March compared to a year ago. In-bound bookings from Canada alone fell 30% in the first quarter, helping to drive a 7% decline in overall inbound travel to the U.S. That was part of the reason Expedia.com cut its full-year guidance for bookings and revenue after experiencing weaker-than-expected results in the first quarter.
At the same time, the demand for short-term rentals offered by such companies as Airbnb continues to grow in popularity. Other alternative lodging sources, such as casinos and cruise lines, are also taking a sizable piece of the hospitality pie.
Financial problems for hotels have been building for at least the past two years, as hotel profit margins at both the gross operating level and the earnings before interest, taxes, depreciation and amortization (EBITDA) level have been declining. Based on CBRE’s forecast, the trend is expected to continue in 2025 and potentially even longer.
In another report, CBRE found that total revenue for all hotel types rose 2.3% last year, with resort revenue declining 2.1%. Even though the average hotel is seeing some growth in revenue, expenses above the average hotel’s gross operating profit increased by 4.1% year over year.
When it comes to hotel rooms, agency commissions for services such as Expedia or Booking.com jumped 6% when measured by dollars per-occupied room. The boost was the single-largest expense increase for hotel rooms. It was followed by complimentary food and beverage, which increased 3.9%. Total labor costs were up 3.5%.
CBRE expects to see higher expenses in many categories in 2025. Labor expenses continue to rise, and the cost of each booking is also increasing, thanks to higher agency commissions, which are still rising much faster than room revenues. At the same time, hotels can expect greater expenses for guest services, including complimentary food and beverage programs and hotel restaurants.
