Labor, Insurance Costs Rising, But U.S. Hotels Continue Comeback

Cost increases plagued the nation's biggest hotel chains in 2023, with expenses like labor and insurance eating into margins. But a steady stream of leisure travelers and higher room rates helped the companies maintain profitability.

On their fourth-quarter earnings calls, hospitality executives were mostly optimistic about this year as well. Revenge travel might be fading, but supply constraints mean elevated room rates aren't coming down anytime soon, a fact that has helped the industry cope with the seemingly strong but still uncertain economic climate.

“It was a solid year,” Morningstar Credit Senior Vice President David Putro told Bisnow. “Outside of properties that have specific issues, generally there seems to be solid net cash flow growth. And even anecdotally, I've traveled a bit already this year, and hotel prices are not going backwards at the moment.”

Occupancy for U.S. hotels averaged 63% during 2023, edging up 0.6% compared with 2022, according to STR. The industry raised prices during the year, with average daily rates up 4.3%, outpacing headline inflation and contributing to a 4.9% increase in revenue per available room.

Labor shortages have eased after years of understaffing in the wake of the pandemic. But hotel operators are paying more for their workers. 

The industry will collectively cough up $123B in pay for workers this year, up more than 20% from 2019, according to the American Hotel & Lodging Association. U.S. hotels shed more than 680,000 employees during the first pandemic year of 2020.

Since then, the industry has added more than 400,000 employees, leaving hotels with fewer workers than pre-pandemic. In January, more than 67.6% of respondents to an AHLA survey said they were experiencing staffing shortages.

CoStar put the growth of overall hotel labor expenses at 12.3% in 2023, with food and beverage labor expenses increasing 9.1%, spurred by a partial revival in group travel.

“The labor situation has chilled out,” Reveille Hospitality partner Marco Roca Jr. told Bisnow, adding that while labor is now more expensive, it is more available than it was for a few years. “I don't think we're in the staffing crisis we were in even a year ago, and certainly not two or three years ago.”

Total operating expenses continue to challenge the industry, with CBRE reporting in February that during the third quarter, U.S. hotels saw their total operating expenses grow by 10% compared with the same period in 2022. Total operating revenues haven't kept up on average, increasing 7.4% during the same period.

Insurance expenses have been another sore spot for the industry, up 19.5% annually through Q3. The cost of insurance is estimated to take 1.7% of total operating revenue, up from the long-run average of 1.2%, according to CBRE.

RLJ Lodging Trust Chief Financial Officer Sean Mahoney said on the company's earnings call that fixed costs such as insurance and property taxes were the most significant driver of the year-over-year increases in hotel operating expenses. 

But a supply shortage created the opportunity for hoteliers to raise rates, offsetting some of the cost increases.

“We're still in this very limited new supply environment in economy and midscale, which generally favors pricing,” Wyndham Hotels & Resorts Chief Financial Officer Michele Allen said during the company's most recent earnings call.

“And overall, RevPAR growth is highly correlated to GDP, and that's still expected to grow 2% to 3%,” Allen said. “Our segments have limited new supply coming in, and that generally favors pricing power.”

Wyndham reported global RevPAR of $43.10 for last year, up from $41.88 in 2022, though U.S. RevPAR slipped 30 cents year-over-year in 2023.

HVS reports that RevPAR will grow 2.7% this year and roughly 3% per year until 2027, per STR forecasts, supported by revived group travel, leisure travel and possibly better business travel.  

The supply of hotels built over the last 10 years, at least ones that have sufficient meeting space, has been anemic, Hilton CEO Christopher Nassetta said during his company's call, adding that the demand for that kind of property is now up.

Net income for Hilton Worldwide Holdings was $1.2B for 2023, down from $1.3B in 2022. RevPAR came in 12.6% higher last year than the year before.

As of the end of 2023, 152,000 hotel rooms were under construction nationwide, STR reported, a drop of 4.5% compared with a year earlier. The drop may be temporary, as the number of planned rooms at the end of 2023 came in at 726,000, up 18.5% compared with the end of 2022.

“I was sitting around this table yesterday, planning our own conferences — for sales conferences and general managers and all these things that we have — going out three and four years because we can't get space in our own hotels,” Nassetta said.

Much of that is due to small and midsized companies, which have “robust” demand for meeting space, Marriott International CEO Anthony Capuano said during his company's earnings call. Large corporations are lagging but are also increasing their business travel. 

“Total industry revenues and profits were well beyond 2022 levels as pricing power continued to outweigh the impact of softer leisure demand,” Claudia Alvarado Cruz, senior analytics manager at STR, said in a statement. “A lift in corporate demand made improvements especially notable across the upper-upscale brands and major markets.”

Hoteliers are doing more than just raising room rates to goose revenues. Marriott’s franchising agreements used to specify royalties of 2% to 3% for food and beverage at some of its full-service brands, but last year, the company raised that range up to 4%.

Despite the overall health among hotels, there are still some weaker spots in the industry, JLL Global Head of Hotels Research Zach Demuth told Bisnow.

“The middle is what is struggling because while individual leisure travel is quite strong, business travel is not, and that's typically what contributes to food and beverage catering,” Demuth said. “Labor costs are higher than in '19, and everything is higher for a variety of reasons.”

At the same time, the top tiers of the industry had a particularly strong 2023.

“Luxury and upper-upscale guests, what we call the mass affluent customer, have really been prioritizing spending on experiences over material goods,” KSL Capital Partners partner John Ege told Bisnow. “And we've seen that trend continue.”

Corporate travel is definitely coming back, but it is harder to predict where that segment will go this year since it is tied so closely to the economy, Ege said.

There are also mergers and acquisitions in the air.

Hilton has pursued a strategy of engaging with smaller and more unusual partners to expand the reach of its Hilton Honors program. In February, the company inked a deal with AutoCamp, an outdoor lodging brand with locations near national markets, so that travelers can book AutoCamp stays through Hilton and use Honors points there. Hilton has made a similar arrangement with Small Luxury Hotels of the World.

Wyndham is the target of an $8B hostile takeover bid by Choice Hotels, which nominated eight people to sit on Wyndham's board after the current board rebuffed Choice's cash-and-stock offer late in 2023.

Such a combination would create the largest branded hotel chain in the U.S. with a concentration in the limited-service sector, enough so that Sen. Elizabeth Warren is calling for the Federal Trade Commission to potentially block the deal.