What happens when hotel labor costs outrun the operating model? Whether theoretical or practical, this is a question many unionized New York City-based hotels are grappling with after a new eight-year labor agreement covering nearly 250 hotels raised the floor for non-tipped hotel workers.
The agreement will increase wages by $21.20 per hour over the life of the eight-year contract, with annual raises averaging more than 5 percent. For some housekeepers, that puts annual pay on a path to more than $100,000 by 2034.
Alan Reay, president at Atlas Hospitality Group, believes these new figures total more than a payroll hike.
“By boosting wages by roughly 50 percent over eight years – pushing housekeeper pay from $40 per hour to over $61 per hour by 2034 – this deal establishes a massive new baseline for hospitality labor costs across the country,” he said.
This new benchmark can be unpalatable for many as the labor deal has implications far beyond what a housekeeper makes. Anne Lloyd-Jones, director of consulting and valuation services and national practice leader at HVS, points to provisions surrounding benefits, including increased pension funding, continued owner-paid health insurance at a higher contribution rate, and employer contributions to funds intended to assist employees with childcare and housing costs.
“Taken together with the wage increases, owners’ costs will increase notably,” she said. “Those increases will obviously affect margins, NOI and asset values.”
Owners Are Running Out of Room to Absorb Costs
For Daniel Lesser, co-founder, president and CEO of LW Hospitality Advisors, the six-figure housekeeper headline is burying the lead.
“The agreement is clearly validating the notion that operating expenses for hotels are increasing quite rapidly and, in many situations, faster than revenues,” he said. “It’s simple math that your profits are under pressure and, at the end of the day, that’s not a durable business model.”
It becomes even less durable when you consider that labor is only one of the costs rising. Insurance premiums, property taxes, utilities, debt service, brand standards, regulatory compliance, maintenance, supplies and capital improvement costs are all straining hotel owners.
These seemingly never-ending rising costs force hotel operators to confront a hard question – who pays? – as the labor deal may just be the straw that broke the camel’s back.
“This isn’t a whole lot of rocket science in terms of what’s going to happen,” Lesser said. “You know what’s going to happen. Room rates are going to go up. We live in a capitalistic society and this is a capitalistic venture. I don’t see any other way around the notion that owners and operators will have no choice but to raise rates.”
The new labor deal can also create a chain reaction. Once labor costs begin eating into operating margins, the strain can move into NOI, asset values, refinancing options and whether the property still justifies new capital.
“Because labor accounts for roughly 40 percent to 50 percent of a full-service hotel’s operating expenses, a 50 percent wage hike strips hundreds of basis points directly from gross operating profit (GOP) margins,” Reay added.
Absorbing the Hit
New York City has one thing working in its favor that’s allowed many to believe hotels will be able to pass on some of these higher expenses to guests: It’s New York City.
“It’s supply and demand,” Lesser said. “New York City consistently runs in the low to mid-80s in terms of occupancy. During peak periods when you can’t get a room, whatever rooms are available go for an insane amount of money.”
Reay also believes New York hotels have more room to pass some of these costs through due to the city’s crackdown on short-term rentals. Reducing the alternative lodging supply has created a severe room shortage that has allowed NYC hotels to “command aggressive ADR increases,” he noted.
Of course, the ability to pass through increased costs will vary significantly by property type, location and market segment, noted Elie Khoury, COO of Crescent Hotels, with luxury and high-demand assets generally having more flexibility than select-service or highly price-sensitive properties.
“Hotels may evaluate a combination of pricing strategies, operational efficiencies and productivity improvements to help offset increased labor costs while maintaining service levels,” he explained. “The challenge is that labor costs are fixed and contractual, while pricing power is influenced by market conditions, competitive supply and customer demand.”
Technology has been a constantly pulled lever when it comes to operational efficiencies. Automation, artificial intelligence, smart design and robotics can lessen the load on labor, but unions are still unions.
“You can’t just one day say we have 20 housekeepers and we’re getting rid of them,” Lesser added. “Theoretically, technology is an opportunity if you can attempt to cut down on costs, but we are in the hospitality business.”
Nevertheless, Reay believes operators will need to “aggressively automate” to survive what he calculates as a 15 percent jump in overall operating expenses.
“Expect the permanent eradication of automatic daily housekeeping, shifting completely to an ‘opt-in’ model,” he said. “Food and beverage spaces will transition to grab-and-go marketplace formats or third-party leases to eliminate union-heavy restaurant staffing.”
From New York to National
This new labor deal may have taken place in New York City, but its effects can stretch far beyond the Big Apple.
“Every other unionized market in the country has been feverishly waiting for finalization on this contract because it was perceived as being the best union hotel contract in America,” Lesser said. “It will be looked to as a beacon when other cities come up for renegotiation.”
It’s already been looked upon as one in some California cities.
“Labor organizers in San Francisco, San Diego and Los Angeles are already using NYC’s $100,000 housekeeper benchmark to recalibrate their own negotiating targets,” Reay said.
For example, UNITE HERE Local 11 in Los Angeles has systematically advanced its "Olympic Wage" campaign, attempting to tie a mandated $30-per-hour minimum wage to the 2028 Los Angeles Olympic Games, he added.
Outside of California, Khoury believes the NYC deal could influence expectations around compensation, benefits, workload protections and service standards in future negotiations.
“It also reinforces the importance of building flexible operating models that can adapt to evolving labor costs while continuing to deliver strong guest experiences and asset performance,” he added.
While the agreement creates financial pressures, Khoury can also see some good coming out of it. Some hotel operators may have needed this final straw to really re-evaluate their business model to ensure all these rising costs can be absorbed without compromising the guest experience. They may have also needed the push to get a little more serious about their investment in technology and automation. Plus, there’s something to be said for adding a layer of certainty to the labor and operating expense equations.
“The agreement also provides long-term labor stability and greater predictability around future workforce costs, enabling more informed planning and investment decisions,” he explained.
Aside from wages, Lesser sees another issue hotel operators will have to watch closely: scope of work.
“In union markets, you have the additional challenge of work rules, which have an effect on total expenses” he said.
Cities including Los Angeles, Santa Monica, Long Beach, Oakland and Emeryville, Calif., and Seattle have adopted rules limiting how much square footage housekeepers can clean in a shift before premium pay requirements kick in.
“Wages are one thing, but work rules are a whole other thing,” Lesser continued. “Even if wages remain flat, if work rules become more constricted, then everything is going up.”
Right now, however, union markets across the country are waiting to see whether New York City’s rate strength will be enough to protect owners from the full force of the increase.
“The market will be able to achieve above-inflationary ADR growth,” Lloyd-Jones said. “Whether this will result in rate increases sufficient to offset the higher labor costs, however, remains to be seen.”