The first half of 2023 proved to be a roller coaster for the California hotel industry, with varying performance across luxury, full-service, and select-service segments. The year started on a high note, especially for luxury hotels, before experiencing a dramatic decline in Q2 across all major areas, compared to the same period in 2022.
Luxury hotels’ RevPAR saw a significant boost in Q1 of 2023 posting a 27.2% increase driven largely by a surge in occupancy of 12.1 percentage points. However, this trend was tempered in Q2 which saw a slight decline in occupancy and ADR resulting in a 3.4% drop in RevPAR compared with Q2 of 2022.
However, as the saying goes you can’t take RevPAR to the bank and in this context, the profit line draws a more concerning picture. Whilst strong top-line performance in Q1 of 2023 versus the same period last year helped luxury hotels in California deliver an uptick of just under $40 the prevailing winds of cost increases were already blowing as payroll grew by nearly a third on a per available room basis and overall expenses came in over 23% up on Q1 in 2022.
And the situation worsened in Q2 as Gross Operating Profit per Available Room GOPPAR fell by nearly 25% with a margin decline of 7.3 percentage points. This meant that the profitability gains of Q1 in luxury hotels were wiped out in Q2 leaving GOPPAR down by just under 2% in the first half of the year.
Turning to the full-service hotel segment, Q2 2023 witnessed a struggle in generating profits, despite an overall steady Total Revenue per Available Room (TrevPAR) growth trajectory. While Q1 TrevPAR grew by 46.2% tailing off to 3.44% growth in Q2 nevertheless delivered a 20.6% TrevPAR increase over the first six months of 2023 compared with the same period last year.
Despite this dramatic growth in TrevPAR a key challenge for this segment, as with luxury hotels, is the surge in total hotel expenses. With total hotel expenses in the full-service sector increasing by nearly 18% and payroll growing by over 25% on a per available room basis the TrevPAR uptick of 20.6% in the first half of the year led to a GOP margin decline of 1%.
That’s a disappointing result for operators since the ADR for full-service hotels reached an all-time high in January and surpassed both 2022 and 2019 rates in the latest 6-month data.
The select-service segment displays similar characteristics though the swings are somewhat less pronounced than in the luxury and full-service sectors. In overall terms in the first six months of the year TRevPAR grew by just over 10% but with rising expenses and upward payroll pressures GOP margin fell by 1.3 percentage points.
The year so far has been challenging for the profitability of the California hotel industry, despite revenue growth. It will be interesting to see if the second half of the year brings the same cost challenges since combined with a tapering off in revenue growth margin erosion could become significant. Moving forward, it will be crucial for hoteliers to keep a close eye on market trends, leverage cost benchmarking data in particular, and adopt more data-driven strategies to navigate the evolving landscape.
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*Research done by Bugsy Chiu