Although the U.S. recovery from the Great Recession has been slow and uneven, unemployment has gradually dropped, and both inflation and labor costs will likely start increasing. An analysis by Cornell Professor Jack Corgel shows that hotels should be able to maintain or increase profits in this environment, because of their ability to increase room rates to match or outpace expenses. Corgel’s report, “Hotel Profit Implications from Rising Wages and Inflation in the U.S.,” is available at no charge from the Cornell Center for Hospitality Research (CHR) and is published in conjunction with the Cornell Center for Real Estate and Finance. Corgel is a professor of real estate at the School of Hotel Administration.
Corgel examines the Phillips Curve, which links unemployment and inflation in an inverse relationship. Although wage increases in the U.S. have so far been tentative, eventually low unemployment levels mean that wages must increase to attract workers. Corgel’s paper demonstrates that even as labor costs increase late in the economic cycle, hotels can raise rates to match or exceed the effects of wage inflation.
“Two things make this possible,” he explained. “First, the hotel business depends largely on leisure guests, and these people will have more money for traveling as their incomes rise. Second, hotels alone among real estate categories can raise rates to overcome the higher expenses caused by increased wages.” He points out that price increases in other types of commercial real estate are restrained by contracts and leases, while all types of real estate benefit from a delivery lag, since supply additions require considerable lead time.
“Thus we see that late-cycle nominal changes in hotels’ average daily rate (ADR) historically have well exceeded inflation,” he concluded. “My analysis anticipates that in the coming months hotel owners should be able to improve real profits to a greater extent than other types of real estate ownership.
