By Robert Mandelbaum, Tim Dick
Prior research conducted by CBRE Hotels Research revealed that hotel management companies were rewarded handsomely as the U.S. lodging industry recovered from the COVID-19 pandemic. An analysis performed by CBRE in April 2023 found that total hotel revenue increased by 153% from 2020 to 2022, while Gross Operating Profits (GOP) grew by 437%. This resulted in a 68% increase in the fees paid to management companies and brought management fees back to pre-pandemic levels. The increases in fees were largely due to the improved performance of U.S. lodging properties, which in turn triggered the payment of incentive management fees.
As U.S. lodging industry performance decelerated in 2023, so did the amount of fees paid by owners to their management companies. Preliminary results from CBRE’s annual Trends® in the Hotel Industry survey find that total hotel revenue growth slowed to 6.9% in 2023, while GOP inched up by 3.5%. As a result, total management fee payments rose by just 1.2% during the year, well below the double- and triple-digit growth rates seen in the previous two years.
To gain a better understanding of how and why management fee payments decelerated in 2023, CBRE analyzed the performance of 1,445 U.S. hotels that reported management fee payments in both 2022 and 2023. In 2023, this preliminary sample averaged 162 rooms in size and achieved an occupancy level of 70.2%, along with an average daily rate (ADR) of $195.65.
Variation by Property Type and Chain-Scale
Management contracts are structured to reward management companies for superior performance. Conversely, when performance levels decline, so does the compensation to the management company. The variances in changes in management fees from 2022 to 2023 become very evident when analyzing the data by property type and chain-scale.
In 2023, total revenues and GOP increased for all property types in the CBRE sample except resort hotels. It is important to note that a large component of CBRE’s sample of resort properties operates in the luxury chain-scale segment. The sample of resorts achieved an ADR of $604.65 in 2023, down from $649.13 in 2022. Due tothe decline in ADR, total revenues for the resorts dropped by 2.0% during the year, which resulted in a 12.1% drop in GOP. With revenue and profits both declining, management fees for resort operators decreased by 16.8%.
To provide some context for the luxury chain-scale resort sector, it is important to note that resort hotels performed surprisingly well during the pandemic. As markets around the world reopened, many US travelers opted for leisure travel abroad during 2023 which lessened resort demand (perhaps temporarily), resulting in more competitive room rates and performance.
Among the other property types, convention hotel operators enjoyed the greatest increase in management fees as group demand in large cities increased. Most of these properties operate in the upper-upscale segment. In 2023, the recovery of group demand caused convention hotels to experience an 8.1% increase in revenues along with a 13.0% uptick in GOP. Given these significant gains, convention hotel management fees grew by 13.8% from 2022 to 2023, the most of any property type.
Management fee changes for other property types are similar to the relative pace of recovery from 2020. After lagging in recovery, full-service and all-suite hotels (upscale and upper-upscale) exhibited relatively strong gains in revenues and profits during 2023, as business travelers continued to re-enter the market. Consequently, management fees for these two property types increased by 6.9% and 7.4%, respectively, in 2023.
In general, economy, midscale, and upper-midscale limited-service and extended-stay hotels oriented towards leisure travelers led the lodging industry recovery in 2021 and 2022, and the pace of recovery naturally slowed down in 2023. Accordingly, the management fees paid at these property and chain-scale categories increased the least during the year. From 2022 to 2023, limited-service management fees rose by 5.4%, while extended-stay payments grew by 4.5%.
Across all chain scales, management companies continue to be keenly aware of the struggle to improve profits. The shortage of labor, increasing costs for all resources, and the need to control flex and flow expenses are all factors that must be considered when trying to increase profitability. Managers are routinely confronted by asset managers for improved margins within payroll alone, which necessitates close examinations of the scheduling and use of labor at hotels.
A Rollback in Incentive Fees
Incentive management fees are paid to management companies to make sure they are aligned with the owners need to grow profits, not just revenue. Therefore, with the pace of profit growth slowing down, we have seen a commensurate deceleration in the value of incentive fee payments.
CBRE analyzed a sub-group of 80 hotels that reported paying an incentive management fee in both 2022 and 2023. Among these 80 properties, 34 reported a decline in incentive management fee payments. At these 34 hotels, revenue growth was 4.1%, but GOP increased by just 0.1%. This resulted in a 4.9% reduction in the incentive fees paid to the management companies from 2022 to 2023.
On the other hand, the management companies at the remaining 46 hotels benefited from a 4.1% in management fee income. The hotels they operate enjoyed a 7.7% increase in total revenue along with a 4.5% rise in GOP in 2023.
Regardless of performance, incentive fee payments were made most often at convention, resort, and luxury hotels. This implies that incentive fees are less likely to be found in the management contracts for lower-priced limited- and select-service hotels.
Management Fees Work
In general, management fees appear to be in sync with the desires of owners. When a hotel outperforms the market, management fees often rise because the operating thresholds required to trigger incentive fee payments are met. Owners and asset managers are continually analyzing new operational measures to inspire management to improve performance.
Some factors are out of the control of management. Therefore, to the degree that non-management factors influence a hotel’s performance, a management company can see their income fluctuate. This could mean a loss in management fees like we saw in 2009 and 2020, however it could also mean management companies will “ride the improved tide” as market conditions improve.
Management fees which are tied to performance-based management are here to stay and owners and asset managers will likely continue to find creative ways to hold managers accountable – which will hopefully ensure continued improvement in the industry, barring any black swan events or economic downturns.
