Hoteliers continue to seek efficiencies to offset escalating costs. The top expense for most hotels is labor, 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 labor shortages, alongside new regulations like New York City’s Hotel Safety Act, are putting hoteliers in a weaker position when negotiating contracts with labor unions.
The Impact of Rising Labor Costs
At the recent New York University International Hospitality Investment Forum, Laura Resco, head of Americas for HotStats, said that since 2023, increases in labor 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 percent over the last five years, labor costs are up 13 percent and hotels still are not back to the staffing levels of 2019. “So definitely labor 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.
Read more at Hotel Management's sister site Hospitality Investor.