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A new report from Cornell University’s Center for Hospitality Research, however, suggests increasing inflation rates and labor wages may, in fact, be a good thing for hotels.
The report, “Hotel Profit Implications from Rising Wages and Inflation in the U.S.,” paints a much rosier picture for the U.S. hotel business than most hospitality executives and hotel owners might anticipate in the near term.
There’s valid reason for hoteliers’ concerns about labor costs and rising inflation: In December, a new federal overtime rule will go into effect so any U.S. employee who makes less than $47,476 per year will be eligible for overtime pay. And cities across the U.S. are considering adopting a $15 minimum wage. In Los Angeles, that minimum wage has already gone into effect for some hotels.
In his report, Cornell professor Jack Corgel argues that even if inflation and wages rise, hotels will be able to maintain or even grow their profits by raising room rates to match or exceed the additional cost of expenses. This case for profitability being made despite the fact that labor costs (employee salaries, wages, and benefits) account for 44.8 percent of total operating costs, on average, for U.S. hotels.
Even though some U.S. cities, especially New York, are in a hotel building boom, Corgel argues that economic expansions have, historically, led to revenue growth at hotels, even with higher costs of labor, as long as those new hotel supplies lag behind actual hotel growth demand. “Current and near-term future conditions indicate the threats to top-line revenue growth in most hotel markets from overbuilding are minimal,” he wrote.
To counteract higher inflation and higher labor costs resulting from lower unemployment rates, Corgel suggested hotel management adjust average daily room rates to match the rise in inflation. Unlike a commercial real estate building that operates with contracts and leases, hotels don’t have to abide by fixed rates for their rooms, and they can change those rates easily to make sure they don’t lose any profits.
Likewise, a rising tide lifts all boats or, in this case, when household wages increase, hotels will benefit from consumers who want to stay in hotels and have increased income to spend. “Some business travel may be forestalled due to late-cycle fears of an impending economic downturn, but leisure travel constitutes 70 percent of total domestic travel,” Corgel noted.
“The hotel business depends largely on leisure guests, and these people will have more money for traveling as their incomes rise,” Corgel said in a release. “Second, hotels alone among real estate categories can raise rates to overcome the higher expenses caused by increased wages.”
His recommendation to hoteliers? “We see that late-cycle nominal changes in hotels’ average daily rate (ADR) historically have well exceeded inflation. 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.”