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Demand for U.S. hotel rooms is projected to contract in 2008 and 2009, resulting in lower growth rates for occupancy, average daily rate and revenue per available room compared with the prior year, according to PKF Hospitality Research.
Due to the slowdown of the U.S. economy, "compounded by the negative consequences stemming from airline capacity cuts," PKF predicted a 0.2 percent decline in lodging demand for full-year 2008 and a further loss of 1.1 percent for 2009, said PKF Hospitality Research president Mark Woodworth.
Hoteliers in the first half of 2008 "were able to raise their average daily room rates by 4.2 percent," despite a 2.5 percent decline in occupancy, but Woodworth cautioned that "the typical hotel manager will not be able to maintain their aggressive approach to raising room rates." PKF forecasts ADR growth for full-year 2008 of "3.6 percent, followed by a minimal 1.3 percent gain in 2009." Woodworth said he doesn't "foresee ADR growth exceeding the pace of inflation until 2012."
Smith Travel Research vice president Duane Vinson said his firm also expects average daily rates to increase for 2008 and 2009, but at a slower pace than in recent years. STR reported that ADR in the United States for September grew about 3 percent year over year, whereas occupancy declined 5.9 percent from 2007 and revenue per available room was down 3.1 percent.
According to a National Business Travel Association survey of 230 U.S.-based travel buyers conducted between July and September, 16 percent of respondents said the industry has "reached a hotel buyers' market." Just over half said "not yet," while 25 percent said "somewhat." Seven percent said "No."
"Definitely, the travel buyer has the upper hand coming off a weak 2008, and 2009 is not going to be better" for the lodging business, said Vinson. "The power shift has gone back to the buyer because of the softer demand. It is going to be a good opportunity for lower-rate negotiations. The hotelier is going to have an urge to say, 'We are going to do what we have to do and not discount like we did last time; take it or leave it,' " he said.
Unhappy buyers expecting to see a complete turnaround are encouraged to "keep shopping," Woodward advised.
Indeed, 65 percent of NBTA's respondents said they were "either suggesting or encouraging the use of midprice hotels instead of luxury properties." Meanwhile, 16 percent of respondents said "hotels rejected last year have approached me with new proposals." More than one-third reported seeing rates fall below negotiated levels with preferred hotels.
"Even though demand has declined, the customer still is obligated to pay the agreed-upon price," in volume agreements," said Woodworth. "Thus, the price is higher than it otherwise would have been if no contract existed. While overall occupancy levels are declining, there are still periods when demand exceeds supply, and thus pricing power remains in the hands of the hotel manager." And yield management systems "are better than ever in terms of their ability to aid in achieving the highest price possible," he added.
Woodworth noted that hoteliers were able to "maintain rate integrity," despite the occupancy declines this year partly due to "persistent yield management, plus contractual rate agreements."
"Once the first hotel on the block starts cutting rates, then it is just a downward effect from there. Then every other hotel in the area feels like they have to cut rates in order to compete and at the end you are back to square one. So cutting rates for an individual hotel is definitely not the answer," said Vinson.
PKF said it expects revenue per available room to increase "a mere 0.8 percent for 2008" and decline by 3.2 percent in 2009. Total hotel revenues are expected to increase slightly (by 0.2 percent) for full-year 2008, and decline by 2.5 percent in 2009.
Supply growth is compounding the slowdown for lodging firms, Woodworth noted. PKF expects a net increase in 2008 and 2009 of nearly 275,000 new hotel rooms, or 6.2 percent more inventory than at year-end 2007. However, the credit crisis may be "delaying or preventing the start of hotel projects currently in the pipeline." Consequently, PKF predicts a "very limited" number of new hotels as "supply growth drops to 1.4 percent and 1.8 percent, respectively, in 2010 and 2011."
"By 2010, we will start to see a reversal of current trends," Woodworth continued. "While the pace of supply growth will be waning, we will start to see a return in the demand for lodging accommodations." PKF forecasted a "2.2 percent increase in demand for 2010, followed by another 3.1 percent gain in 2011. With growth in demand exceeding supply, national occupancy levels will begin to rise again in 2010 and continue to increase through 2012."
Meanwhile, American Express Business Travel on Wednesday issued its 2009 forecast, predicting hotel rates in North America could decline by one percentage point from 2008 levels or increase as much 6 percent. "The record oil prices that began in 2008 are expected to continue to impact the hotel industry and airline capacity cuts should drive down demand in some markets," according to the company's report. "As new hotels expand global supply and demand decreases in some markets, travel buyers should have increased bargaining power for 2009 rates."
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