Likely Boost for Hotel Profits According to Cornell Analysis
August 30, 2016 9:10am
Ithaca, NY, August 30, 2016 - Although the U.S. recovery from the Great Recession has been slow and uneven, unemployment has gradually dropped, and both inflation and labor costs will likely start increasing. An analysis by Cornell Professor Jack Corgel shows that hotels should be able to maintain or increase profits in this environment, because of their ability to increase room rates to match or outpace expenses. Corgel’s report, “Hotel Profit Implications from Rising Wages and Inflation in the U.S.,” is available at no charge from the Cornell Center for Hospitality Research (CHR) and is published in conjunction with the Cornell Center for Real Estate and Finance. Corgel is a professor of real estate at the School of Hotel Administration.
Corgel examines the Phillips Curve, which links unemployment and inflation in an inverse relationship. Although wage increases in the U.S. have so far been tentative, eventually low unemployment levels mean that wages must increase to attract workers. Corgel’s paper demonstrates that even as labor costs increase late in the economic cycle, hotels can raise rates to match or exceed the effects of wage inflation.
“Two things make this possible,” he explained. “First, the hotel business depends largely on leisure guests, and these people will have more money for traveling as their incomes rise. Second, hotels alone among real estate categories can raise rates to overcome the higher expenses caused by increased wages.” He points out that price increases in other types of commercial real estate are restrained by contracts and leases, while all types of real estate benefit from a delivery lag, since supply additions require considerable lead time.
“Thus we see that late-cycle nominal changes in hotels’ average daily rate (ADR) historically have well exceeded inflation,” he concluded. “My analysis anticipates that in the coming months hotel owners should be able to improve real profits to a greater extent than other types of real estate ownership.”
Tags: center for hospitality research,
cornell center for hospitality research,
The purpose of the Center for Hospitality Research is to enable and conduct research of significance to the global hospitality and related service industries. CHR also works to improve the connections between academe and industry, continuing the School of Hotel Administration's long-standing tradition of service to the hospitality industry. Founded in 1992, CHR remains the industry's foremost creator and distributor of timely research, all of which is posted at no charge for all to use. In addition to its industry advisory board, CHR convenes several industry roundtables each year for the purpose of identifying new issues affecting the hospitality industry.
Contact: Carol Zhe
The Center for Real Estate and Finance, established in 2009, is the foremost clearinghouse for hospitality real estate and finance information. Defined by its intellectual capital, industry experience, and rigorous academics, the center is respected as a leader of real estate and finance. Built on a tradition of quality research in the hospitality industry and a growing real estate and finance faculty, the center is at the forefront of research in all areas of commercial real estate—from studying the behavior of real estate assets in investment portfolios to understanding real estate capital markets and science of hedging real estate risk.
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