Navigating New Legislation and Labor Shortages

How is the Industry Performing?

California’s hospitality industry is one of the largest in the country, boasting a market-combined* inventory of 573,578 rooms, 13% higher than the state of Florida. The state’s warm climate, tourist attractions, and beaches draw many visitors and investors whose interest prompts continued development to meet growing consumer demand. Over the last 12 months, the market has seen 7,126 new rooms delivered and over $2.2 billion assets traded. Despite grappling with the aftermath of a down market, California’s hospitality sector has shown signs of resilience, and its recovery is a promising sign for investors and developers. The state’s average occupancy rate of 53.7% and $171.92 ADR indicate that travel has returned, and tourism is alive and well.

*This information includes data from thirteen major California markets: Los Angeles, San Diego, Orange County, San Francisco/San Mateo, Inland Empire, Central Coast, San Jose/Santa Cruz, Sacramento, South/Central, North Central, Oakland, North, and Wine Country.

Hospitality Challenges

Here are some of the top issues facing California’s hospitality sector:

1. Labor Shortages: According to the American Hotel and Lodging Association (AHLA), in February 2024, a survey of hotels found that 67 percent of them were facing a shortage of staff, with 12% percent experiencing a severe shortage. Employees in the industry face challenges such as low wages, long working hours, and a lack of job security. Many businesses struggle to find skilled employees to fill vacant positions, leading to a decline in customer service quality. The labor shortage also inhibits productivity, affecting the industry’s overall revenue.
2. High Hotel Prices: Recent information provided by travel website Hopper indicates that the average hotel room price in the United States during January 2023 was $212 per night, 54 percent more expensive than last year. Using comprehensive data from 5,073 hotels, Kayak found that the average price for a hotel in California is $221 per night, with a median price of $170. While high hotel prices may seem beneficial for businesses, they cause problems for customers and employees. High hotel prices are driving away customers looking for affordable options, leading to a decline in the industry’s revenue. These prices can impact employees by reducing demand for rooms and services, leading to layoffs or reduced hours, increasing workload and stress, and affecting employee compensation and benefits.
3. Competition: The hospitality sector in California is highly competitive, and businesses must continuously innovate and improve their services to stay ahead of the competition. Smith Travel Research reported that the state had over 430,000 hotel rooms across 4,000 hotels in 2023.
4. Changing Consumer Preferences: Consumers are becoming more discerning and demanding regarding the services they expect from the hospitality sector, forcing businesses to implement updated amenities. According to CoStar, businesses are under increasing pressure to implement updated amenities that align with these evolving consumer preferences. This includes investing in Property Improvement Plans (PIPs) to renovate and modernize facilities, ensuring they meet the expectations of today’s discerning travelers. From state-of-the-art fitness centers and spa facilities to eco-friendly practices and smart room technologies, hotels are prioritizing PIPs to enhance guest experiences and maintain competitiveness in the market.
5. Environmental Concerns: As the tourism industry grows, hospitality businesses face increasing pressure to adopt sustainable practices and reduce their environmental impact, forcing businesses to implement new technologies. According to Booking.com, 73 percent of surveyed travelers intend to opt for sustainable accommodation this year. This marks a consistent increase in environmentally conscious travelers over a six-year period.
6. Government Regulations: The hospitality sector in California is subject to a wide range of government regulations, which can be complex and challenging to navigate for businesses. Recent legislation like California Assembly Bill 537 and California Senate Bill 478 adds new layers of compliance. AB 537 aims to ensure transparency in rate advertising for short-term lodging, requiring providers to include all fees and charges in advertised prices. Similarly, SB 478 expands consumer protections under the CLRA and prohibits businesses from advertising prices that exclude mandatory fees.

New Minimum Wage Law Enacted

On January 1, 2024, the minimum wage in California rose to $16 per hour, applicable to all employers, regardless of the number of employees they have. Fast-food restaurant employers will witness a minimum wage increase to $20 starting April 1, 2024. This law establishes a unique council comprising workers, corporate representatives, franchisees, and state officials, intending to set basic industry standards such as minimum wages, working hours, and other employment conditions for fast-food workers throughout the state. McDonald’s has mentioned closing 600+ stores due to the Fast Recovery Act passing in California, as employers are burdened with increasing wages and payroll taxes. Restaurant operators can expect to pay an additional $250,000 on increasing sales and wages and ensuing payroll taxes, per the NOA (National Owners Association).

How New Legislation Poses a Threat to the Industry

So, how does the minimum wage for fast-food restaurants affect the hospitality industry? Hotel owners could be forced to choose between losing employees or losing profit to raise their minimum wage and stay competitive with fast-food companies. As a result, hotel owners are anticipating a notable shift in their labor dynamics due to this recent legislation, prompting the need for proactive planning to address the impending changes.

Takeaways

In conclusion, California’s hospitality sector faces numerous challenges on the horizon, and stakeholders need to develop effective solutions to address them. While some of the challenges may be beyond businesses’ control, measures can still be taken to mitigate their impact and ensure that the industry remains competitive and sustainable in the long run.