Caleb Jones/AP Photo
Occupancy was back up to over 90 percent of pre-pandemic levels in Hawaii’s unionized hotels, but only 64 percent of employees were called back to work.
Key to Joe Biden’s narrow 2020 victory in critical swing states was UNITE HERE, the country’s largest union of hospitality workers. Its diverse and disproportionately female members knocked three million doors in the critical states of Nevada, Arizona, Pennsylvania, and Florida, securing commitments from over 400,000 infrequent voters. They dialed ten million phone numbers on behalf of Joe Biden’s presidential bid, and in Georgia, made voting plans with over 250,000 Warnock/Ossoff voters. As the 2022 midterms approach, UNITE HERE is planning a similar effort.
But the union faces two huge obstacles for a repeat performance. First, COVID-19 struck a brutal blow to UNITE HERE’s rank and file, for obvious reasons. In 2020, some 98 percent of members were laid off as travel plummeted and hotel reservations evaporated. Second is a much more insidious threat: real estate investment trusts (REITs) and their taxable REIT subsidiaries (TRS), which have cored out the hospitality workforce to juice short-term profits as high as possible, in typical Wall Street buccaneer fashion. Fortunately, Biden and his appointees have tools to rein in these companies, and they would be well advised to use them.
The stated intention behind REITs was not always financial predation. In 1960, Congress established their legal framework under the rationale that small investors without huge amounts of capital needed a mechanism to profit off income-producing real estate—that is, space someone pays money to rent, like an apartment, hotel, or office space. The original law exempted REITs from corporate income tax, but required that they limit their role to that of investor, and not employer. Individuals could invest money in the real estate market through an asset-holding REIT, but restrictions prevented strategic restructuring and large investors attempting to use REITs to guide the day-to-day operations of the companies leasing out their properties.
Like any mechanism that enables tax avoidance, the REIT was eventually exploited. In 1999, the hospitality lobby successfully changed the 1960 law through the REIT Modernization Act, which created a Trojan horse for hotel REITs to partially control the businesses occupying the real estate they were invested in: the aforementioned taxable REIT subsidiary corporations. While owned by the parent REIT, TRS companies oversee the day-to-day operations of hotels. The TRS middleman leases properties from its host REIT, then negotiates with independent contractors like Hilton and Marriott, securing oversight on everything from management hiring decisions to budget, all while maintaining the juicy tax cut that made REITs attractive in the first place.
Like private equity behemoths, the TRS was the perfect tool for parasitic investors to suck out profits from the marrow of hospitality firms, leaving brand-name hotels hollowed out and largely controlled by the burrowing REIT.
The pandemic was a golden opportunity to radically scale up this vampirism—by gutting the hospitality workforce. Crepuscular hotel jobs were already exhausting, requiring toil at dawn in dirtied hotel suites and graveyard shifts in cavernous, subterranean laundry rooms.
Were it not for business rescue measures in the CARES Act, the entire hospitality industry would have gone belly-up. But as soon as they had their bailout, REITs quickly pivoted to mass layoffs and increased exploitation for the remaining workers powering their profits.
IN UNION HOTELS IN HAWAII, for instance, occupancy this summer was back up to over 90 percent of pre-pandemic levels, and yet only 64 percent of employees were called back to work.
Ruby Rubina, a housekeeper at Hilton Hawaiian Village in Honolulu, told the Prospect, “Even with high occupancy, there’s no automatic daily room cleaning. We are understaffed. There are nights when we could not clean all the dirty vacant rooms, we had no choice but to leave some for the workers to clean the next morning. The overworked housekeepers are unable to keep up,” Rubina said. “They are letting workers suffer while hundreds are still waiting to have their jobs back.”
Eliminating automatic daily housekeeping delivers REITs millions in earnings otherwise spent on wages, but according to some estimates it could also result in a 40 percent reduction in the hotel workforce and a nearly $5 billion drop in earned wages.
Hotel REITs saw COVID as an opportunity to restructure the hospitality model in a way that cuts labor and services. This included initiatives like automated check-in, the elimination of in-house food and beverage operations, and the end of automatic daily housekeeping. By cutting back on both overall employees and basic services, hotel REITs are following the playbook first championed by private equity: slash costs and boost shareholder profits regardless of the effects on consumers and employees.
At the onset of the pandemic, Mark Brugger, CEO of the hotel REIT DiamondRock, told shareholders in an earnings call: “Never waste a good crisis as they say. We are doing things that we’ve never done before. We’ve combined jobs we’ve never combined before. We’re running at efficiency levels on low occupancy we’ve never done before.” RLJ Lodging Trust CEO Leslie Hale followed suit with an ominous prediction, telling shareholders, “We’re pretty confident based on the way that we’re operating today and the occupancies that we’re running and efficiencies that we’ve learned that we will not have to go back to 2019 levels of labor.”
Hotel REITs saw COVID as an opportunity to restructure the hospitality model in a way that cuts labor and services.
The hotel REITs seeking to capitalize on the pandemic and its cascading effects on the workforce have also been explicit with shareholders about the services and quality they hope to scale back in the name of boosting profits. In a 2021 conference presentation, Park Hotels listed their priorities for a “permanent reduction of full-time, hotel level staffing” through “contactless check-in/room service,” and an effort to “limit housekeeping” and “eliminate or re-purpose unprofitable F&B operations (e.g., buffets) and outlets.” Park Hotels is the world’s largest private-sector owner of Hilton rooms, but that hasn’t stopped them from seriously endangering the long-term value of the hotel industry by alienating consumers and ruining brands’ reputations.
In an earnings call, Park Hotels CEO Thomas Baltimore said to shareholders, “We have been working hard and working with our operating partners and also talking with the union about opportunities to rightsize [the labor] model.”
Despite hotel REITs’ race to eliminate as many workers and services as possible, there is some hope on the horizon. In early February, Sens. Sherrod Brown and Mark Warner sent a letter to Securities and Exchange Commission Chair Gary Gensler demanding greater clarity from REITs, narrowing in on the need for greater transparency on the investment vehicles’ secretive cost-cutting tactics. The senators specifically want the SEC to require REITs to disclose how many of their workers aren’t classified as full-time employees, including subcontracted workers—the entire “material workforce,” in the letter’s words.
The letter continued, “We urge you to ensure that future SEC rulemaking captures this long-term trend of companies’ increasing use of outsourcing, independent contractors, and subcontracting, which will be a critical data point in understanding companies’ human capital management.” Indeed, subcontracting has become a go-to tactic for companies of all sorts to abuse and extort labor without having their names attached—many overworked, over-surveilled, and overstressed Amazon employees don’t technically work for Amazon itself.
But the SEC is not the only federal agency that holds regulatory powers over REITS. Americans for Tax Fairness has also proposed closing an IRS loophole that allows REITs to consolidate profits to a small handful of shareholders.
“Many REITs with only a handful of substantive investors issue two classes of stock: voting and non-voting, with the non-voting issued in private placements to just enough ‘investors’ to meet the 100 shareholders requirements. These non-voting investors usually have very little financial interest in the REIT; many times, they are simply a bunch of names provided by so-called ‘REIT Service Companies’ in exchange for an annual payment,” American for Tax Fairness wrote.
“This dodge allows a small group of wealthy taxpayers to enjoy all the tax advantages of a REIT without fulfilling the system’s original intent of opening up real estate investment to middle-income households. The only determination by the IRS that such schemes satisfy the 100-shareholder requirement came in a private letter ruling,” according to Americans for Tax Fairness. The Internal Revenue Code specifically says that private letter rulings like this don’t count as a fully enforceable precedent. If the IRS just clarified that schemes like this don’t meet the 100 shareholders requirement—which it can do at any time through an official guidance—then suddenly it would be clear that some of the worst actors in the REIT ecosystem are violating the law. It would also help to contain the runaway financialization of the hotel industry by investors blinded by the promise of short-term profit spikes and dangerously unconcerned with the long-term effects of their “streamlining.”
As the 2022 midterms approach, Democratic efforts to win over voters have stagnated. The stubborn legislative refusals of Joe Manchin and Kyrsten Sinema have defanged and disempowered Joe Biden’s efforts to pass his sweeping Build Back Better agenda, imperiling Democrats’ congressional majority and any kind of lasting legacy of the Biden administration. Without action to combat the crisis upending UNITE HERE’s campaign infrastructure, one more vehicle for progressive working people to fight inequality is endangered. Ordering the IRS and the SEC to enforce powers over predatory REITs is a good start on Biden reversing the trend of power flowing from unionized workers to profiteering vultures. Making a public commitment to the largely female, immigrant union workforce that helped him win his campaign would be even better.
