Hoteliers continue to seek efficiencies to offset escalating costs. The top expense for most hotels is labour, and while technology has reduced staffing requirements a little, there no replacement for most hotel job functions nor for the human touch hotel employees provide guests.
The combination of the increasingly high cost of living and labour shortages, alongside new regulations like New York City’s Hotel Safety Act, are putting hoteliers in a weaker position when negotiating contracts with labour unions.
The impact of rising labour costs
At the recent New York University International Hospitality Investment Forum, Laura Resco, head of Americas for HotStats said that since 2023, increases in labour costs have outstripped hotel revenue growth, and this trend remained strong for the first quarter of 2025. “We expected to see erosion in 2023, but 2024 just continued on that erosion trend,” she added, citing a further dip in gross operating profits of 1.1 percentage points in 2024 from 2023. “So it's basically a one-to-one story of the growth in labor costs directly translating into a decrease in the bottom line.”
Looking at revenue in 2024 vs. 2023, Resco noted that for every $1 increase in the top line, there was a $0.75 increase in labor costs. “This is not for total revenue, just the incremental side of revenue, so that leaves very little wiggle room for other expenses that you have, like the growing cost of sales.” She noted that while hotels increased the top line by $1, they lost four cents on the bottom line.
Comparing 2024 financials with 2019, Resco pointed out that while revenue grew by 7 per cent over the last five years, labour costs are up 13 percent, and hotels still are not back to the staffing levels of 2019. “So definitely labour costs are a matter that can break or make the profitability for hotels, and just how we manage that in this tumultuous regulation environment is key,” she added.
Course of treatment
This erosion will not stop if cost management is left to operators, because there is no incentive for them to improve efficiencies and productivity, warned Andrea Grigg, global head of Hotel Asset Management at CBRE Hotels, stressing that a healthy bottom line is the result of the efforts by asset managers or hotel owners. Research also found that gross operating profit expenses rose 3.6 percent, while revenue only increased by 2.3 percent overall. ”This stayed true for all property types, except for extended-stay and select-service that continue to be more efficient operating models.”
Grigg suggested that asset managers or hotel owners take control over staffing levels to ensure that staffing matches demand and partner with the operators to find ways to make the guest experience relevant and automate the back of the house and tasks that are not accretive to the core purpose of operations and everyday tasks.
Deciding where to cut corners without sacrificing guest experience is a matter of business model, Grigg suggested, noting that operations are more complex for luxury brands than mid-level or select-service and are less flexible in terms of reducing service or cutting tasks, each one of which has a cost. “It's a matter of business model. It's a matter of the expectations of guests. It's a matter of what is that brand’s standard of a luxury. It’s also a matter of having the right operator that understands that niche and an operator and asset manager working together to see which complexities can be simplified to a linear model without sacrificing guest experience,” she continued.
Tech as a tool
Technology is helping to make back-of-house processes efficient, like administrative work but Resco noted that technology is becoming more guest facing and a part of the guest journey. She suggested that managers consider how technology use is perceived by guest. For example, she said that a check-in kiosk may be perceived as inadequate desk attendance. Therefore when deciding which technology to utilize, she encouraged managers to think about what guests value and what types of interactions add to their experience, not just replace human jobs with machines or apps. When adding technology, she suggested considering whether it is adds or takes away value from the guest experience and always have a backup plan in case it malfunctions.
Grigg noted that technology has become a line item in P&L, with constant increases in fees and licenses. But automating certain tasks, like in back-of-house does reduce FTE (full-time-equivalent) and can improve the guest experience, she said. Grigg suggested, however, that use of technology is not always well thought out. “My advice is to treat technology like a CapEx item. It has to have a ROI, there has to be a measurable point as part of that investment, and you need to prove that it’s working,” she said.
“If you do an audit, one of the biggest issues is that technology is being used at 25 – 50 per cent of its capabilities,” Grigg continued, noting this is mostly due to lack of training and buy-in of property team members. To get the most out of technology, she emphasized that team members must be taught how to use it and understand how it’s going to make their workday better.
Regional differences
Resco noted that hotel performance is regional, with the most acute problem in the Western states. Looking at Western hotel performance in 2024 vs. 2019, she noted that revenue was up 3 per cent, but costs rose 12 per cent. “When we look at flow through in the West, every dollar of revenue increase from 2019 to 2024 came with $1.33 increase in labour costs,” Resco added noting that by comparison Southern hotels revenue was up 13 percent and labour costs 16 per cent, outpacing revenue but by much less than Western hotels. She noted that labor costs in the Northeast remain the highest nationally, so hotels did not see an appreciable change over the last five years, because the benchmark at 41 per cent of total costs was so high to begin with.
“When we talk about labor costs, it’s not just wages, but work rules that nothing to do with the real basis of business nor protection of workers and turnover,” said Grigg, noting that some of the biggest increases in labour costs are for sales, marketing and finance due to high demand for those talents and a shortage of executives at those levels.
“But looking at the direct cost implications of any labour laws or regulatory changes is just half of the equation,” she continued noting that the other half of the equation is legal fees to keep operators, owners, and asset managers compliant, avoid fines, knowledgeable every time there's a regulation change.
Talking talent
On the other hand, money spent on the right talent is money well spent, according to Grigg. “The talent shortage is a part of that cost structure that we need to think about when we think about culture,” she said. “Culture saves you money. If you have an operator that has the right culture, if you have the leadership at the property level to drive the right culture, that is going to save you money and labor costs in the long run.”
“Engagement drives performance or results,” adds Resco. “Engagement of your employees, how you bring them into your properties, and how you retain them is key. When you have high turnover, your employees are not going to be as productive as well-seasoned employees that have been with you for years.” In addition, human resources costs go up to recruit, vet and train employees, and new employees make mistakes, so guest recovery costs go up too, she said. “It can even affect the room rate, if there suddenly are negative reviews.”
From an asset management perspective, Grigg recommended having a copy of job descriptions to understand what each individual is doing and if they are essential.” She noted that with regulatory changes, like the change in the threshold of overtime, and cost increases for employee safety standards, all of this is going to add on and the only way to make that gap up is to reduce the number of employees. “We don’t have other options,” Grigg suggested.
“You will need to reduce the number of managers, cross utilize managers effectively in the areas where you really need them, ensure your staffing and schedules match hotel peaks and valleys of demand,” she continued. “And you need to micromanage the functions, where you want that manager or that supervisor be productive, and decide what side of the business is going to be impacted. It is critical to have that kind of visibility from an ownership perspective, to understand if your business and your bottom line are being optimized,” Gregg said.
On the horizon
In conclusion, Grigg said her team is still adjusting, adapting and trying to understand the impact of new labour laws and minimum wage changes and working through stricter measures for international hirings, which are core for many high, seasonality destinations.
She noted, however, that New York hotels have a whole different layer of complications due to passage of the Hotel Safety Act, which many hoteliers fear will spread to other cities. “Everyone should be looking into that, and second, the productivity scheduling laws that are in place in Seattle, Chicago and New York that require employers to give 14 days of notice before changing an employee’s schedule. That's very hard to manage, as you can imagine.
“So we see more cities embracing and expanding on that law, and we are also looking at employee safety and well-being,” Grigg continued. While that will continue to evolve and become an area of focus for regulatory compliance, she said that investment will help with employee retention, reducing turnover in the long run.
Additionally, sustainability is going to come from the investor, stakeholder side, expect a stricter adherence to energy savings and other efficiencies, and more environmental reporting coming your way, she said. “We’ve been talking about that for a while, but we are seeing this, in particular from international investors requiring more and more reporting.”