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NYC hotel labor deal raises costs and tightens financing underwriting

Hotel industry groups project the new contract will lift annual property costs by 15 percent, while labor can reach up to 50 percent of operating expenses in many properties.

Reported · Written up by our desk · Residential

Commercial Observer reports New York City hotel investors face additional hurdles as lenders tighten underwriting standards in response to a new eight-year labor agreement covering more than 27,000 workers at over 200 hotels.

The Hotel Association of New York City contract took effect July 1 and runs through June 30, 2034, putting housekeepers and non-tipped staff on a path to earn over $100,000 annually by 2034. The agreement is projected to increase annual property costs by 15 percent through added wage and benefits expense.

The report notes labor can represent up to 50 percent of operating expenses, and in service-intensive or luxury properties, fixed labor costs including wages, health care, pension and staffing requirements can be up to 30 percent higher than comparable nonunion hotels.

Commercial Observer also cites Solomon Garber, co-founder and chief revenue officer of Erithmitic, saying even a 10 percent rise in operating costs can push an operator’s earnings before interest, taxes and amortization down by 4 to 6 percent if revenue does not keep pace, even as he argues lending still has value but may require more capital providers such as preferred equity or mezzanine lenders.

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