The extreme difficulty companies have finding workers is a national headline with the hospitality industry serving as the poster child.

In response to the challenging labor market, hourly wage rates, salaries and other monetary incentives are being used to attract talent, driving up payroll costs and acting as a precursor to inflation. Despite the increasing costs, hotels benefit from the ability to reprice daily to maintain profit margins, making informed hotel investments a risk-adjusted hedge.

While the labor situation is extremely nuanced, it is clear the cost of labor is rising for hourly wages and salaries. For the time being, the increase in payroll is partially offset by improved productivity due to the temporary suspension of brand standards, operating changes resulting from COVID-19 and continued labor reductions. Time will tell which operational changes and productivity improvements are sustainable.

The shortage of employees is not exclusive to hourly positions. It is also occurring in sales, accounting and other mid- and senior-level management positions.

Anecdotally:

• A property in an international gateway, top 10 market, with organized labor, went through a recall list, finding one in three workers declined to come back, indicating they have left the hospitality industry. Fortunately, employee wage rates and productivity standards are still governed by the collective bargaining agreement.

• A hotel located in a city with a comparatively low cost of living, in close proximity to outdoor amenities, that experienced a high level of in-migration from gateway urban locations during COVID-19, increased all hourly wages 20%. Additional hiring incentives include a signing bonus, retention bonus and referral bonuses. These wage increases and bonuses also applied to existing employees as a means of retention.

• An assistant director of finance accepted an accounting role with a real estate investment firm, making $15,000 more than his 2019 salary. The hotel lost the full production the assistant director and part-time night auditor, who was being paid as an assistant director of finance three days a week and night auditor two nights a week.

There are numerous reasons workers are not back in the market:

• Individuals on unemployment continue to benefit from additional stimulus funds, in some cases making more money than while employed.

• The work environment can also be hostile with guests taking out aggressions over disagreement on mask policies, the reduced service levels and operational challenges from ramping up the hotel.

• The fluctuations in COVID-19 cases and changing municipal restrictions result in unreliable hotel occupancies which in turn makes it difficult for employers to schedule consistent hours for employees.

• Associates may be forced to continue to provide childcare if schools are not fully back to in-person learning, thus limiting their employment options.

Another widely reported outcome is that people have simply left the hospitality industry for other sectors. Outside of hotels, starting wages and benefits likely are on par or better than what was offered with a more consistent and predictable schedule. Skills from mid- and senior-level management positions in sales, accounting and administration are easily transferable between industries.

When inflation occurs, the rise of the input costs associated with producing a product or service are then passed on to the consumer. In the real estate sector, for an asset class like offices, rent is governed by the rates in the lease agreement. Any increases in expenses are bore entirely by the owners and not the tenants. The ability to reprice hotels rooms daily or adjust food and beverage, parking or spa services on a real-time basis allows any inflationary pressure to be passed on to the guest.

There are revenue management actions that can be taken now, including:

• Adjust room rates commensurate with projected labor and productivity expenses.

• Review and adapt pricing to maximize on length of stay and day of week trends.

• Scrutinize the total revenue potential of booking a group earlier in the booking window versus the short-term actualization of transient guests willing to book higher room rates coupled with ancillary spend.

• Review booking channels to ensure options for buying down are not available, especially moving into the window of 30, 60 and 90 days to arrival.

• Optimize on earnings during the pandemic by increasing the price of upgraded room types at the time of purchase or protect prospects for upselling at check in.

The disruption caused by COVID-19 is an opportune time to change the paradigm of hotel stays. Take a cue from the airlines and recognize traditionally bundled products and services and decouple them to create a la carte pricing. Or take the opposite approach and identify openings to further bolster packaging or programming around the (urban) resort fee.

The market is showing clear improvement with increasing demand. Reservations for the summer months are showing the pent-up demand for travel. If the spring break travel season was an indication, the summer months will have meaningful occupancies.

Generally, it appears the industry has learned from past mistakes and did not discount rates as severely as in the last downturn to induce demand. Reports from select hotels, market players and corporate earnings statements indicate room rates have generally held versus 2019 and, in some cases, exceeded 2019 levels. Initial indications are that travelers are eager to spend pent-up savings on travel experiences, and prices are more inelastic.

In other words, an increase in price will not significantly decrease demand.

This is an inflection point in the recovery. Stimulus money is running out. The last round of loan modifications is coming to a close, and lenders will have less patience to work with borrowers.

There are clear signs that labor costs are driving up the cost of a hotel stay. What we have learned regarding line-level workers and mid-tier managers is that the hotels down the street are no longer the only business to sample during a wage survey. Now is the time to pass the increase in payroll and other costs on to the consumer.

Inflation is coming to the lodging industry. The benefit of a hotel as an investment hedge is the opportunity to match the inflation of expenses with adjustments in prices to optimize revenues and profit.

Darryl Law is an asset manager overseeing hotel assets for public REITs, private equity and lenders.

The opinions expressed in this column do not necessarily reflect the opinions of Hotel News Now or CoStar Group and its affiliated companies. Bloggers published on this site are given the freedom to express views that may be controversial, but our goal is to provoke thought and constructive discussion within our reader community. Please feel free to contact an editor with any questions or concern.