Is this the beginning of the end for New York City hotel industry?

Is this the beginning of the end for New York City hotel industry?

For those who missed my earlier blog, an unprecedented seven-year union contract has been finalized between the New York Hotel Trades Council, AFL-CIO and the Hotel Association of New York City. The agreement was negotiated in a mere 18 days ? surely a record ? and, surprisingly, five months before the old contract expired. 

To say the contract was ?one-sided? is simply an understatement. People who can remember back to Super Bowl XXIV in 1990 may recall the blowout: the 49ers beat the Broncos 55-10. That made headlines, yet why have we heard so little about this incredible contract? Is there a fear that any hotel owner or GM that speaks out will endure the ?Wrath of Khan? from their unionized staff? As an outsider, I can only make hypotheses.

My interest is more than academic. My fear is that the ramifications of this contract will start to build in tsunami-like fashion from deep within the ocean until it comes crashing to shore, ultimately smashing the New York hotel industry as we know it, leveling it to the ground.

Yes, there have been a few perfunctory articles like those from the New York Times in which Peter Ward of the union proudly proclaimed that he gave up nothing to the Hotel Association in order to achieve his negotiating wish list for the employees. 

A Hotel Online email from February 12 stated, ?At the end of the new contract, in June of 2019, room attendants will be earning almost $60,000 a year with full family medical, dental and optical benefits.? The Hotel Association also agreed to fully fund an increasing percentage of pension benefits. The employees do not even have a copay! All these benefits in a 35-hour work week! Hello? 

What seems to have escaped the association is that these are not frothy times for the hotel industry or the U.S. economy. The rumble may have started. Steve Van, president and CEO of Prism Hotels and Resorts, said, ?While hotel performance metrics are expected to be solid for the next five years, the financial structure is pending catastrophe.? Actually, all this structure really needs is a small nudge in the wrong direction. This new contract could be considered a severe body blow.

Hotels survive by earnings, not revenue or even customer service. Loans are based on earnings. Valuations are based on earnings. What happens to those earnings when payroll increases 30%? New York is still trying to overcome the 2006 union agreement in which earnings steadily rose more than 20% for a five-year period, despite the recession. But let?s focus on this new agreement. What will a 30% increase in payroll expenses already do to a fragile income statement? What will owners do to try to pay their debt service? How will they secure rollover financing with a huge increase in expenses?

These new expenses are now carved in stone. They are proverbial yokes around every owner?s neck. There is only one obvious solution: Room rates must be raised. It?s the only variable that can be changed now. So let?s see. An 18% increase in expenses will probably require at least a 20% increase in rate just to break even. And that does not account for benefits or any other expenses rising. New York is already very expensive. The dollar is strengthening. How will hotels survive? 

Owners may now need to rethink the best use for their buildings. Rates may rise, but expenses definitely will. Physical hotel assets will be worth ess. Fewer new developments will include hotels, as the economics will not justify their construction. Scenarios beyond this are unfathomable: Hotel workers will become unemployed. The Hotel Association will wonder how it happened. They will blame everyone but themselves.

So how is the Hotel Association expressing a mea culpa to the owners? How are they currying favor with the group who will be footing the bill for this negotiating debacle? The new union contract takes care of that by ?throwing the owners under a bus.? The Hotel Association not only agreed to all of these increases, but also agreed that all owners must now sign the union agreement and that any of the owner?s subsidiaries or affiliates will also fall under this agreement. Oh, and by the way, the Hotel Association agreed to dramatically increase the geographic area covered by this agreement to include most of New Jersey!

But enough for now. In the meanwhile, I suggest you do what Peter Finch so eloquently did in the 1976 Oscar-winning movie ?Network.? Go to your window and yell, ?I?m mad as hell, and I?m not going to take it anymore!?