Seattle hotel development persists amid costly labor
Seattle hotel development persists amid costly labor
10 JULY 2019 8:26 AM

Seattle hotels had to bite the bullet after the city’s minimum-wage mandate forced businesses throughout the city to pay workers up to $16 an hour, but higher operating costs haven’t scared away hotel developers.

REPORT FROM THE U.S.—The latest phase of Seattle’s Minimum Wage Ordinance went into effect this year, increasing the mandatory hourly rate to $16 an hour for companies with 501 or more local or global employees. Despite the hotel industry’s ongoing complaints about the rising cost of labor, Seattle continues to be a hotspot for hotel development.

The newest phase also requires businesses with 500 or fewer employees to pay a minimum wage of $12 an hour, in addition to $3 per hour in medical benefits or tips. Otherwise, these “smaller” employers must adhere to a $15 minimum wage requirement. The law first went into effect in April 2015.

Yet since the ordinance took effect, the minimum wage increases haven’t proven a panacea to the labor shortage that plagues the hospitality industry. Visit Seattle President and CEO Tom Norwalk pointed to the low unemployment and high cost of living that so many hotel and restaurant hiring managers across the U.S. are up against.

“The higher minimum wage is part of the solution, but where these workers can afford to live is also a major consideration and so is getting into the city,” Norwalk said. “Our city and region have continued to expand light rail and bus service, but it’s not as developed or isn’t happening fast enough to really satisfy a lot of people.”

Hoteliers, however, are taking notice of enhancements to the city’s public transportation network, with Jeff Gouge, regional VP of operations for Northwest x Southern Hospitality and GM of The Arctic Club Seattle, a DoubleTree by Hilton Hotel, noting that light rail improvements—to the north and east of the city especially—should give hotel staff a better alternative for communicating to downtown.

Jim Alderman, EVP and chief development officer at Extended Stay America agreed that Seattle’s public transport system is very practical for hotel employees.

“Seattle’s minimum wage increases have not made it easier to find workers, because in major cities like Seattle, where rent growth has been extreme, labor is a constant issue, and we find our staff is commuting from further and further out,” he said.

Alderman went on to further point out that from a financial perspective, Seattle’s minimum wage hikes impact every hotelier. But as the extended-stay model is known for its lower labor-to-revenue cost ratio, he also added “ESA and our Seattle operators are relatively less impacted by the minimum wage because with only 10 to 12 full-time employees at each of our hotels, we have less overall payroll.”

But there’s more to Seattle’s hotel scene than simply labor costs. According to STR’s latest Seattle market report, revenue per available room and average daily rate benefited from year-over-year growth between 2014 and 2018, even though occupancy took a 2.3% year-over-year tumble in 2018 as supply went up 5.3%. STR is the parent company of HNN.

“Occupancy growth is starting to decline as supply is outpacing demand,” explained Ali Hoyt, senior director of consulting and analytics at STR. She also attributes 2018’s slight growth in RevPAR (0.8%) to the drop in occupancy, despite the fact that rates increased by 3.1%.

Nevertheless, Alderman described rates as well as RevPAR and overall lodging metrics for ESA’s 15 hotels in the Seattle area as “outstanding,” noting that the maturity of the market and the fact that some of the world’s largest corporations have a strong presence in Seattle as contributing factors.

Despite last year’s slight dip in occupancy, Seattle’s occupancy rates have consistently averaged in the mid-70s since 2014, which Hoyt said puts them ahead of national averages. Supply, however, will continue to climb with another 2,001 rooms under construction.

In March, Seattle-based Columbia Hospitality opened The State Hotel, a 91-room boutique property in the former landmark Eitel Building. CitizenM is slated to open a Seattle location next year, and luxury fitness brand Equinox plans to open a hotel in a downtown development previously known as The Hotel at The Mark. Hyatt Place and Hyatt House will both debut at the Seattle-Tacoma International Airport (SeaTac) in 2021, following last year’s opening of the 1,260-room Hyatt Regency Seattle, the Pacific Northwest’s largest hotel by room count and by meeting space, 103,000 square feet.

The additional room counts will be counterbalanced by an increase of new developments coming to Seattle, including: a new international arrivals facility as part of SeaTac’s $1.9 billion renovation and expansion project; the 2022 opening of a second convention facility, the Washington State Convention Center; a reported $900-million expansion of the KeyArena in preparation of a new NHL franchise; and a multiyear waterfront revitalization program that will connect Seattle’s downtown hotels, restaurants and Pike Place Market to a new waterfront with twenty acres of improved parks, public spaces, pedestrian walkways and bike lanes.

Gouge anticipates the city’s new developments to create fresh demand.

“The new convention center will put Seattle on a new level to attract more conventions and help the area realize even greater economic growth,” he commented. He also believes the new NHL team will boost business in off-peak months. John Oppenheimer, CEO of Columbia Hospitality, concurs that the new convention center will play a major role in the city’s ability to absorb new room inventory. He also explained that the arena expansion will enable the facility to not only host professional sporting events like NHL hockey and Seattle’s WNBA team, but it is also expected to serve as a forum for other events like concerts that will also better hotel business. Alderman expects Seattle’s second convention center to cause compression further out, in turn raising rates.

These new developments are in addition to in addition to nine consecutive years of record growth in visitor arrivals, peaking in 2018 at 40.9 million visitors, a 2.5% jump from 2017. Norwalk credits Seattle’s business sector with continuously pushing the numbers forward.

“All of the corporations based in our region—from Boeing and Amazon to Starbucks and Expedia—are all healthy, so the business travel segment has remained incredibly strong,” he said. These companies along with Microsoft, Zillow, startups, global health care firms, bio tech shops and cancer research organizations have also fortified the city’s meetings and conventions business, for which 2018 was a record year. “We broke records for convention center business in 2018 when we hosted 50 national groups that also resulted in record-setting attendance.”

In other words, in-person meetings are ironically essential to tech companies.

“No one meets more than tech companies, and no one has as much of an appetite for face-to-face meetings,” Oppenheimer said. “Talk to any hotel in town, and they will tell you their biggest customers are tech companies. Tech companies realize their face-to-face meetings can’t be replaced by technology and that’s why the meetings market is so strong in Seattle.”

These tech executives and employees are also hotel guests in Seattle and recognizing just how critical real relationship building is to their business also extends to how they’re serviced by Seattle’s hotels.

In Oppenheimer’s words, “People should be compensated fairly and generously and with a livable wage, because at the end of the day, your hotel can be the most beautiful building in the world, but it’s the people who work in it who bring the guest back time and time again, and we’re very focused on that.”

Alderman is prioritizing the redevelopment and renovation of several existing ESA properties in Seattle –notably the ESA located on Microsoft’s campus and another that sits next to TMobile’s campus.

“We have a 22-year head start on the real estate in this market, so we need to drive more profit from our hotels here and maximize their value,” he said. Alderman is also keeping an eye on vacant retail space in Seattle’s suburbs.

Gouge forecasts future hotel development in Pioneer Square where an increasing number of companies have moved into new or existing buildings over the past few years and consequently, there has also been an influx of residential buildings.

As for Seattle’s minimum wage, Norwalk accepts that it has made operations more expensive for Seattle’s hotels and restaurants. However, he views the wage increases as a means of challenging long-held misconceptions that entry level positions in the hospitality industry are not well paid.

“This is also necessary to make the industry meaningful to only students in high school, college or technical school, but to a broader workforce –and that’s an issue for hotels around the country,” he added.

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