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Facing a Slowdown in Hotel Room Rate Growth, Hoteliers Helped by Lower Hourly Wage Growth

Hotel Owners and Operators Are Facing a Slower Pricing Environment
CoStar Analytics
May 10, 2023 | 9:12 P.M.

The Bureau of Labor Statistics published the latest average hourly earnings of employees in the accommodation sector and the preliminary average March wage stood at $23.33, the highest amount on record.

The change from a year ago was an increase of just over 6%. In the past four months, accommodation-sector employees have been able to realize higher wages at around this pace. In November of last year, wages grow 5% and this change has increased slightly to 6.2% in the last month.

However, these rather modest increases stand in sharp contrast to the spike in wage growth that hotel operators had to digest in the first three quarters of 2022 when the average hourly wage increase was 12.8%. In addition, in the latter half of 2021, wages had already grown by 13.5%. Put differently, the rate of growth today is half of what was recorded just two years ago.

Slower growth in expenses, especially in the all-important labor category, is helping operators to keep costs in check. This becomes more important now that the top-line room rate growth is slowing as well. In the second half of 2021, the average daily rate, or ADR, grew 39.8%. In the first three quarters of 2022 ADR increased at a slower pace of 26.4%. And since November rates have increased by an average of only 11.7%. Compared to the second half of 2021 that constitutes a deceleration of hotel room pricing growth by around two-thirds.

Hotel owners and operators are facing a slower pricing environment as the American economy veers towards an, albeit moderate, recession. Consumers will likely curtail some spending as unemployment rates inch higher and economic uncertainty increases. At the same time, the last three years of operating in a pandemic have shown hotel managers what functions can be consolidated, what services can be cut, and what amenities do not provide value.

The outcome has been a leaner staffing model, and the employment headcounts of 2019 will likely not be reached again. At the same time, staffing is still an issue for many hotel companies and so wage increases, however modest, will likely continue.

Due to the recession, ADR increases are expected to be muted going forward as well. But if growth rates for expenses and revenue stay in check, profitability may not be affected that much, which would be welcome news for owners and operators.