2012 Business Travel Survey: Hotels Expect Seller's Market To Persevere

Despite continuing economic uncertainty, hoteliers are projecting several more years of rate growth. The tough negotiations many buyers experienced for 2012 rates therefore are not likely to get easier anytime soon.

[Please click here to view the digital edition of the 2012 Business Travel Survey, featuring all charted data, downloadable as a pdf.]

PKF Hospitality Research president Mark Woodworth in a recent webcast noted a "disconnect" between the performances of the hospitality industry and the overall economy. Even with high unemployment, high gas prices and other obstacles that have stymied growth in the United States, 30 out of 50 of the major domestic hotel markets sold more rooms in the fourth quarter of 2011 than in any other previous quarter. Looking at just hotel rooms in upper-tier properties, 47 out of 50 sold more than ever before, Woodworth said. "It's a good time to have a drink, as the outlook is extremely good."

Although analysts projected that U.S. demand growth would be less than half of what it was last year, supply growth will continue to be negligible throughout North America and in Japan and much of Europe. Within the United States, it will be less than 1 percent this year, below the long-term average of about 2 percent, according to Smith Travel Research. As such, tight occupancy in many key markets will become even tighter.

"We expect the law of supply and demand will push rates upward for some time to come," said Starwood Hotels & Resorts Worldwide president and CEO Frits van Paasschen during the company's recent first-quarter earnings call. "Even if developers were building hotels tomorrow, it would take at least three years for that supply to hit the market, and in all likelihood, construction won't start tomorrow."

In general, 2011 rates were up across most hotel brands that publicly report performance, especially across higher tiers. The average daily rate at Starwood's St. Regis and Luxury Collection properties, for example, rose 8.9 percent from the 2010 level; rate increases at Mandarin Oriental properties averaged 10.3 percent for the year; and the average Ritz-Carlton rate in North America was up 6.3 percent. Rate increases among most midprice and economy brands, meanwhile, more commonly were in the range of 2 percent to 3 percent.

In the United States, the average daily rate increased 3.8 percent compared with 2010 and is projected to increase by a similar amount this year, according to STR. Even with the increases, rates still have a "long way to go to get back to peak levels in nominal terms," Woodworth said.

Of course, the hotel industry's recovery is not without potential snags, including rising oil prices that could stifle demand and ongoing European economic troubles that are likely to affect travel both within Europe and to key global gateway cities. Regardless, hoteliers said they expect to see their revenues rise this year—possibly at an impressive clip.

"We are as sanguine about the near term as we've been before the crisis, but we're as bullish as ever about the long term," van Paasschen said. "In fact, we believe we're on the cusp of a golden age of global travel."

Corporate Travel Driving Growth

In examining worldwide hotel bookings through global distribution systems, Pegasus Solutions noted that corporate travel has been the "bedrock of recovery" and has driven much of the demand growth seen since the recession. Van Paasschen cited corporate demand as a major reason for his optimism for 2012, and suggested full-year 2012 hotel performance might end up more positive than forecasts currently project.

"Corporate travel plans reflect confidence in their business and in the global recovery," he said. "I still have yet to hear from a customer who plans to travel less in 2012 than in 2011."

This year's corporate hotel rates on average also are increasing globally. Advito estimated that rates are up 5 percent to 6 percent in the United States, 2 percent to 3 percent in Europe, 8 percent to 10 percent in Asia/Pacific and as much as 20 percent in Brazil.

Group bookings, at least on the corporate side, also appear to be showing improvement this year. Marriott International president and CEO Arne Sorenson during his company's first-quarter earnings conference call said the 2012 group booking pace was up 11 percent from the prior year.

Similarly, Hyatt Hotels Corp. president and CEO Mark Hoplamazian noted that bookings for 2012 made during the first quarter were up 13 percent, and rates on those bookings were up 6 percent. "Overall, the strength we saw in the group business in the quarter primarily came for corporates, largely driven by consulting, technology and IT," he said. "Windows are still fairly short. Many meetings have been booked within 90 days."

Hoteliers Focus Capital Investment

The Asia/Pacific region continues to boast the world's largest active development pipeline, with most major hotel companies pursuing rapid expansion in China, India and other emerging markets. The largest growth during the next few years is projected for New Delhi, Mumbai, Bali, Manila and Jakarta, each poised to increase their current room supply by at least 20 percent, according to STR Global.

Marriott's Sorenson said the gangbusters rate of growth in China might moderate slightly as the government slows the residential real estate market; most full-service hotels developed there are a part of mixed-use projects. "Despite this, we expect China to remain one of the fastest-growing lodging markets in the world," Sorenson said.

Hoteliers in North America are growing more by conversion than new construction. Starwood's van Paasschen said 70 percent of the company's hotel deals in the region secured during the first quarter were conversions.

Even with modest supply growth projected for the United States, the country's active pipeline still is larger than any global region besides Asia/Pacific, although only about 20 percent of that pipeline currently is under construction, according to STR. Most of those rooms are in the upscale and upper midprice tiers—including such select-service properties as Hilton Garden Inn, Courtyard by Marriott and Holiday Inn. Only 7 percent of the active pipeline is in the upper upscale or luxury tiers. Overall, the total U.S. pipeline decreased by 9 percent from April 2011 to April 2012.

In contrast, the pipeline in the Middle East and Africa largely is centered on the upper upscale and luxury tiers. Europe's pipeline, meanwhile, is slightly skewed by the upcoming Olympic Games in London. The region this year actually is poised to have more rooms come online than all other global regions, according to STR Global managing director Elizabeth Randall. About one-third of those—more than 13,000 rooms—will be in the United Kingdom. In 2013, however, total room openings for Europe are projected to be fewer than half of those in 2012.

Outside of new development, Woodworth said the forecast for years of growth make it a "great time for hotels to be investing capital into domestic lodging and renovating assets." As such, many hotel companies are embarking on brand overhauls and relaunches.

Marriott, for example, reported that its owners and franchisees in 2011 spent about $1.5 billion on renovations. By the end of this year, it projects about two-thirds of Renaissance properties and three-quarters of U.S. Courtyard hotels will have renovated public spaces.

Fresh from its $1 billion Holiday Inn brand relaunch, InterContinental Hotels Group last year turned its attention to Crowne Plaza and has embarked on a multi-year plan to enhance amenities, renovate properties, add new locations and remove underperforming hotels.

Similarly, Choice Hotels International is upgrading its Comfort Inn brand with new front desks, bedding and breakfast plans. As a part of that project, about 400 Comfort Inn properties during the next few years might leave the system.

Hyatt last year announced a rebranding of its extended-stay Summerfield Suites brand to Hyatt House, which it augmented last year by purchasing an $802 million portfolio of hotels from hotel management company LodgeWorks, including 17 Hotel Sierra properties to be converted to the Hyatt House brand.

Tackling Distribution

Amid rising revenues, hotels during the next few years also will have to deal with rising distribution costs.

A joint study of distribution channels by STR and the American Hotel & Lodging Association released last year showed that about a third of 2010 U.S. hotel stays were booked through global distribution systems, online travel agencies, hotel websites and other digital channels. Within the next five years, about 50 percent of U.S. hotel bookings will occur through those channels. This could potentially double hotels' distribution costs, according to the study's authors.

The industry has yet to see the impact of major new players wading into the hotel booking space. Google only recently has launched a metasearch tool, Hotel Finder, and Apple received a patent for an iTravel product but hasn't yet launched anything under that brand. In the meantime, most hotel brands are developing and enhancing mobile applications that encourage direct booking.

Even with the proliferation of new booking gizmos, however, the study's authors wrote that the GDSs for the foreseeable future would remain as the dominant supplier of hotel bookings for managed corporate travel programs.

This report originally appeared in the June 4, 2012, edition of Business Travel News.