Labor costs factoring into how deals are done
Labor costs factoring into how deals are done
02 JULY 2019 8:12 AM

Increasing labor costs are starting to filter into how both buyers and sellers look at hotel assets, according to experts on the Lodging Industry Investment Council.

NEW YORK—There’s no getting around the continued chatter about labor in the hotel industry, both in terms of the scarcity of qualified candidates and the increasing costs, experts said at the recent meeting of the Lodging Industry Investment Council.

During LIIC’s gathering in conjunction with the 2019 NYU International Hospitality Industry Investment Conference, owners and operators said labor is clearly the top issue in the industry.

Jeff Dallas, CDO of StepStone Hospitality, said labor costs are factoring into asset values and doing due diligence when underwriting deals now more than ever.

“We’re underwriting our benefit model on a pro forma basis versus historic operating costs,” he said. “We’re at the point in the cycle where more and more capital groups are peeling the onion back further and further. And if you peel it enough, there will be no onion left.”

But the problem is there isn’t as much transparency in terms of labor costs in the market, said Mike Cahill, CEO and founder of Hospitality Real Estate Counselors.

“The real issue is as brokers, we don’t see (labor costs) itemized, just the bottom line,” he said. “I haven’t seen a lot of brokers pricing in labor costs in the current environment we’re in.”

CHMWarnick President and co-founder Chad Crandell said he gets concerned when he sees investors making overly optimistic projections about labor costs, and he believes many hoteliers aren’t properly factoring in the costs of both retention and recruitment. Although, he believes paying a bit more to keep staff is the better of the two.

And it’s not just an issue for line-level employees, he said.

“I’d rather pay a little bit more (to keep people) than have constant turnover because it’s very disruptive,” he said. “With an open position, it can take months to fill for a GM, director of finance or director of sales and marketing. The time and opportunity costs of that are significant. At a certain point, you’ve got to treat people well and pay them fairly, because having a good team will pay for itself.”

While those manager positions are the subject of increasing competition, Crandell said the issue for line-level employees is a simple one.

“You just can’t find anybody,’ he said. “We have hotels that have rooms we can’t sell in destination resort markets because we can’t find the labor.”

David Duncan, president of First Hospitality Group, said given tightening margins, some hotels on the market or preparing to go on the market have scaled back staffing to a minimum to maximize profits and therefor asset value, which can be a significant problem for buyers in the long term.

“On day one, you have to hire people back and properly compensate them,” he said

He said retaining employees is less expensive but still not cheap. It’s not just an issue of dollars and cents, though, and many employees will value a workplace that values them in other ways.

“The biggest issue is treating them with respect and establishing a company culture they don’t think is against them, that goes a long way with the younger crowd,” Duncan said. “They want a culture of respect and listening to them, which is very different than my early days.”

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