President Clinton recently proposed to increase the minimum wage in the U.S. by $1, or 19.4 percent over the next two  years. Although this is more likely to directly influence small businesses, high-volume competitive industries such as fast-food chains, and part-time employers, it is also likely to affect the hotel industry in a variety of ways, albeit on a market, and property-specific basis. 

Markets with a strong union presence and upscale properties are expected to be the least affected, as the minimum wage increase will not approach the high wages contractually awarded. However, for an increasing number of markets that are reaching supply saturation, properties with heavy seasonal labor demands, and budget and economy properties with narrow margins, the proposed increase in minimum wage is likely to directly translate to reduced profitability In addition, prices for hotel goods, food and beverage items, linens, and guest supplies are likely to increase since much of the workforce in these production - -oriented industries are minimum wage earners. 

Row will the individual property react? In strong markets such as New York, San Francisco, and Boston, much of the direct increase is likely to be passed on to the guest in the form of elevated average daily room rates. In weak markets, layoffs (when possible) will be a direct result and service will suffer. Under either scenario, reduced profitability will likely occur either directly or indirectly, curtailing the underlying value of the assets. 

If the minimum wage increases, there is likely to be fallout in terms of industry - -wide profitability. Thoughtful income valuations that provide an indication of a property's value based on the present value of a future income stream should recognize profit shortfalls due to labor costs which outpace revenue growth. Will it stop the widespread acquisition of properties? Unlikely, as the acquisition of new properties is fundamental to Wall Street's earnings expectations. However, it is likely to decrease the overall attraction of hotels as an asset class for private investors and developers.