Experts Weigh In On Hospitality's Rising Cost Of Labor

Hotel housekeepers are leaving to rival hotels for 50 cents or $1 more an hour. The short supply of subcontractors for hospitality projects is driving up construction costs. Cities are implementing more work rule protections.

Whether it is building or operating a hotel, the rising cost of labor in Los Angeles is one of the biggest issues in the hospitality industry and could either increase the price of the development or lower its sale price, experts say.

“Labor costs are definitely an issue, particularly in today’s climate where revenue growth is slowing but expenses are growing on a steeper path, resulting in eroding profit margins,” Chartres Lodging President and co-founder Maki Nakamura Bara said.  

“There’s a lot of different dimensions to this, but at the end of the day labor costs are going up,” she said.

Despite those challenges, the hotel supply in the Los Angeles market is experiencing an influx of new hotel development in Hollywood, West Hollywood and downtown.

Bara will be one of the speakers at Bisnow’s Los Angeles Hotel Summit March 14.

The Greater Los Angeles region continues to be among the top-performing markets in the nation, according to CBRE. This year, the average daily rate is expected to increase by 2.7% to $186.54 from the previous year. Occupancy rate is expected to be at 79.6%, almost the same as 2018, and revenue per available room is expected to jump 2.7% to $148.57 year over year, CBRE reports.

“As a result of increasing levels of demand, the Los Angeles hotel market is forecast to see continued high occupancy, even with unprecedented supply growth that is roughly three times the long-run average,” CBRE Hotels’ Managing Director Jeff Lugosi said in a news release. “Because Los Angeles is currently operating at or near a stabilized level of occupancy, we expect future RevPAR gains will largely be a function of rate increases in the next few years.”

But what are some of the ways hotels can continue to open and operate at a healthy profit when labor costs continue to go up? Bara and Kruger Development Group principal Nathan Kruger discuss the ongoing labor issue and share some words of wisdom on how they are navigating the escalating costs.

Development

Kruger Development is under construction on a Tru By Hilton, a six-story, 120-room hotel about a mile south of the Los Angeles Stadium and Entertainment District, the future home of the Los Angeles Rams and Chargers football teams. Architecture Orange is designing the hotel.

Kruger said the cost of construction, whether it is the price of land, materials or labor, has been going up every year since the recession.

The lack of skilled subcontractors is probably one of the biggest reasons why construction costs are skyrocketing, he said.

"The development cycle takes many years,” Kruger said. “We’ll get a bid in year one and by the time we get financing and ready to implement in year three, the cost has gone up 20%.”

Kruger said one way the firm has been navigating around high costs is to make arrangements with subcontractors and agree to fix costs and not to exceed that number.

“That’s a really important component of having predictable financing,” Kruger said. “I can’t go back to my lender and say, ‘Hey guys, the cost went up $2.5M because the subcontractor market is insane.’”

Kruger said now more than ever, with so much supply coming into the market, developers need to study their market and pay attention to the key demand drivers that will attract people to the proposed hotel area.

“The number of cranes that I see driving around, especially in downtown and Hollywood, it’s flooding with supply,” Kruger said. “The occupancy rate is pretty good across LA, but I think a lot of these hotels in these markets are going to be set up poorly when we hit some type of downturn.

"[A hotel's success] will depend market by market," he said.

Housekeeping Turnover

Bara said in hotel markets across the nation, she has seen a high demand for housekeepers with many leaving to rival hotels for 50 cents to $1/hour raises. 

“We are having a really hard time retaining housekeepers,” Bara said. “Turnover is happening weekly and monthly.”

With the healthy economy, low unemployment rate and the high supply of hotel products, housekeepers can afford to jump around, she said.

The turnover for these operators is resulting in more training costs, lower product quality and the need to hire contract labor to fill the void. 

She also said cities throughout Southern California are increasing minimum wage for many of these workers and including strict worker protections. Not that those are a bad thing, she said, but they do impact and escalate costs for a hotel owner.

For example, Long Beach voters recently passed Measure WW that requires hotels with 50 rooms or more to provide panic buttons to workers and restricts cleaning duties by square footage. Housekeepers cannot clean more than 4K SF in any eight-hour workday unless the hotel operator pays them double, according to the measure. 

She said some ways hotels are retaining their employees is offering more benefits and perks such as free meals, subsidizing their transportation and offering higher wages.

When it comes to room service, she is seeing a lot of brands adopt "knock and drop" service, in which an attendant will drop off food but it is packaged in a throwaway container.

This prevents another trip to pick up leftovers. Some hotels are also ditching room service and mini bars entirely because labor costs are so high.

Find out more about what is affecting the hospitality industry at Bisnow's Los Angeles Hotel Summit March 14 at Omni Los Angeles Hotel.