Hotels Face New Concerns

The hotel industry in the San Fernando Valley has bounced back post-pandemic, and events including the 2026 World Cup and the 2028 Summer Olympics are expected to be a further boon to the area’s many hotels. But some factors are threatening the industry, including workers’ claims of unfair wages that price them out of living in the area. Nearly 200 union hotel workers were arrested near LAX in June advocating for wage increases.

The hospitality industry has experienced a recent financial uptick from “revenge travel,” the consumer trend of spending big on trips following Covid shutdowns. Hotel revenue, which dipped to $37 billion in 2020, shot to $99 billion in 2022, up from $87 billion in 2019, according to Statista Market Insights.

But that post-pandemic wanderlust may be starting to wane. According to a June report in The New York Times, hotel rates that were skyrocketing during the past two years are increasing at a slower pace than before year over year. In addition, according the U.S. Travel Association, hotel demand nationwide receded in May for the second consecutive month, down 2% from  2019.

Issues abound

Hotel owners in the San Fernando Valley are facing many issues as they try to navigate a challenging period of high labor costs and rising interest rates. 

“I don’t think there’s ever smooth sailing these days,” said Scott Mills, general manager at the North Hollywood-based Garland Hotel. “You have to be strategic. Los Angeles is a very vibrant, awesome city. But there are headwinds.”

And an upcoming strike threat has hotel owners concerned that labor costs will spike quickly.

“Organized labor doesn’t stop trying to impact [the business] and it is affecting everybody’s bottom line,” said Mark Davis, president and chief executive at Universal City-based Sun Hill Properties Inc. Sun Hill’s portfolio includes the Hilton Los Angeles/Universal City.

“Does it impact us? It certainly does,” said Davis “But we have to service our business. So we pay and continue to hire.”

The Los Angeles and Orange County chapter of the National Hotel and Food Service Workers Union voted in June for a strike authorization, with contracts expiring on June 30. Upwards of 15,000 workers at more than 60 hotels in the area could be impacted if the two sides fail to reach an agreement.
The unionized workers, including housekeepers, cooks, dishwashers, front desk agents, servers and food service laborers, are asking for a $5-an-hour raise, with additional raises totaling $11 over three years. They are also demanding affordable health care and reasonable shift hours.

“If you’ve got a luxury hotel in Beverly Hills and you’re charging $800 a night, it could somewhat easily absorb an extra $5 per hour on labor cost, but it’s going to really impact those smaller hotels and the budget to mid-size properties,” said Alan Reay, president at Newport Beach-based Atlas Hospitality Group.

Reay noted that hotels in L.A. County are mostly operating above where they were in 2019 in terms of room revenue. The major exception, he noted, is downtown, which is reliant upon convention business that hasn’t quite returned to pre-pandemic levels.

Reay said net operating incomes are not as strong as they were back in 2019 in terms of the increase in price per room. That’s in large part due to increased costs across the board for everything from insurance, materials and labor. “The labor cost is the single biggest expense that any hotel has,” Reay said.

Updates difficult

The other ominous cloud for the industry is the impact of rising interest rates on construction and renovations. 

“I think we’re seeing a similar situation where the banks are pulling back from the office building market,” said Reay. “A lot of the banks are concerned about the future in terms of the hotel market.”

Alex Kuby, an associate principal at Long Beach-based architecture firm RDC, specializes in interior environments for hospitality. He said he hasn’t seen a slowdown in investment as much as banks gravitating toward traditional developers, pushing upstarts off the scene.
“I think a lot of first-time developers left the L.A. game in favor of more experienced established developers,” Kuby said. “I think that that is the reaction to the lending environment, which is more focused on working with teams that were proven with great track records or working with established brands.” 

Kuby said his firm entered this year with more than 120 projects and about 20,000 guest rooms in the pipeline for the city, many being built in anticipation of the 2026 FIFA World Cup (which will be hosted in part by the city of Los Angeles) and the 2028 Summer Olympic Games coming to Los Angeles.

Davis sees a great deal of roadblocks as hotels try to accommodate an increase in travel to the area. His hotel has seen an uptick in popularity after Universal Studios put its new Super Nintendo World, based on the popular Nintendo Co. video game, at its theme park.

“We are continuing to move forward with construction plans to add on 400 rooms, a new tower,” said Davis. Once we get there, the timing of a construction loan, as well as the landscape of organized labor, could stall us somewhat. The owners frankly ask, is this the right market to continue to invest in? It certainly does give them pause.”

What does all this mean for consumers who are looking for good rates on a room? According to industry experts, it doesn’t look like travelers will see a huge break in prices anytime soon.

Due in large part to the slowdown in lending, the number of U.S. hotel rooms increased just 3% in April 2023 from the same period in 2019, according to STR, a hotel analytics firm. About 153,000 hotel rooms were under construction in April, a drop from 220,000 in the same month in 2020.

Not only could the scarcity of rooms keep prices high, but consumers may also have to pay more in the form of fees. Travelers are already familiar with the recent trend of resort fees, parking fees, pet-stay fees and other charges as hotels nickel-and-dime consumers to recoup pandemic losses. While the Biden administration has targeted some of these practices as “surprise fees” – ones that aren’t disclosed in the advertised room rate – Reay believes that they won’t go away and will be disclosed as options.

“We’ll start to see the hotel business do something similar to what we’ve seen in the airline business,” said Reay. “If you want to have your room cleaned, you’re going to have to pay this extra. I think it’s going be disclosed up front and the customer is going to have to decide.”