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June 18, 2019

Rising Labor Costs and Slowing Growth a Major Concern for Hoteliers

David Wang

2019 Raising Hotel Labor Cost Blog

During this month’s NYU International Hospitality Industry Investment Conference, much of the talk centered around rising labor costs and the effect it will have on the future of hospitality. Hotels operate 24 hours a day year round, which always makes operational costs and labor top of mind for hotel owners and investors. But the concerns this year seemed magnified because of slowing RevPAR growth.

Rising Costs

A report from HVS, a leading hotel management and consulting company, summarized the two conflicting trends.

“It is harder and harder to find staff members to fill positions at virtually all levels of a hotel’s operation, particularly the line-level positions,” wrote HVS’ Rodney G. Clough. “This is driving hourly wages higher, as hotels compete for fewer and fewer available workers. The stricter immigration policies of the current administration are not helping an industry that has long benefited from immigrants as a primary source of employees. Labor costs are rising 5-6% in some cities, which is not balancing well with RevPARs increasing in the 1-2% range.

Clough summarized the sentiment from the event as shifting from cautious optimism earlier this year to more caution now, with concerns over the next downturn growing.

A blog from hotel asset management company hotelAVE echoed those same sentiments in its post NYU recap, citing margin erosion and labor costs as a key takeaway: “Margins peaked in 2017. Labor, insurance, and property taxes are growing faster than inflation. No one is talking enough about the lack of labor!”

Slowing Growth

Although the latest forecast unveiled from STR at NYU did not show a dramatic drop, it did predict a miniscule 0.2% growth in occupancy this year and then a 0.2% drop in 2020. This would be the first annual decline in a decade and what may have hotel leaders taking a closer look at their operating costs. With ADR projected to climb 1.9% this year and another 2.2% next year, RevPAR was forecasted to grow 2% this year and 1.9% next.

But with labor costs now outpacing revenue gains, that is a major concern, said Amanda Hite, STR president, and CEO, according to a news story from Hotel News Now. “The highest growth rate is insurance (+5.8%), and total labor expenses grew 4%,” Hite said. “When you look at (total RevPAR) at 2.9% growth, those fundamentals are difficult to sustain for very long.”

Now is the time for hotel leaders to take a look at their overall operations and processes and identify areas where efficiency can be gained. If costs continue to rise as revenue growth slows — or worse — the industry could soon reach an inflection point.

Before that, hotels need to find ways to get the most out of each staff member, and that does not mean working them harder, rather smarter.

“Technology is critical to our business,” said Ken Greene, president of the Americas for Radisson hotel Group, in an HNN story recapping Day 2 at NYU. “We could probably operate a hotel today with very little human activity, but that’s not the experience you want. You want to make your team on property more efficient so they can engage with the guest.”

Conclusion

As RevPAR growth begins to slow, hoteliers need to start looking at ways to reduce costs and become more efficient ahead of a potential downturn. The human element, as Greene notes, will always be crucial for hotels to deliver a great guest experience.

Technology must be used to help augment that and now is the time for hotels to invest the time and capital necessary to prepare for the future. Hopefully, the hotel industry’s next big conference, HITEC going on this week in Minneapolis, provides some potential solutions that can help.

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