The vast majority of
publicly reported hotel brands in 2013 increased their average daily rates and
appear poised to continue increasing prices during the next few years, perhaps
resulting in the longest hotel seller's market many buyers have seen in their
careers.
In the United States,
hotel occupancy likely will set a growth consistency record this year,
according to PKF Hospitality Research. Should average hotel occupancy increase
this year—and all signs point toward that—it will mark the first time U.S.
occupancy has grown for five consecutive years.
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Hoteliers often cite the
cyclical nature of the hotel industry. Typically, hotels first pick up
occupancy and then rate, then a glut of new supply knocks both down, and the
cycle begins again. This cycle has been a bit different, however. Hotels in
North America currently are in what usually would be "late-cycle market
dynamics," with hotel revenue growth coming mostly through rising rates,
not occupancy, Starwood Hotels & Resorts president and CEO Frits van
Paasschen said in April during the company's first-quarter earnings call.
"Despite this, we're
still several years away from seeing any real increase in supply in most
markets," he said. "At the upper end, new supply is especially
scarce, so as long as the U.S. continues even modest economic growth, it seems
likely that high occupancy and rising rates are here to stay for a while."
In other words,
corporate travel buyers should expect hotels to push for rate increases not
only this year but for the next several years.
"By the time you
actually start adding any real inventory, you are talking late into 2015, 2016
or 2017," Choice Hotels International president and CEO Stephen Joyce said
in April during his company's first-quarter earnings call. "Not only do we
feel really good about 2014, but we're really excited about what we see for the
next several years."
If last year was any
indication, hotel negotiations this year will be a market-by-market challenge.
Buyers on average kept year-over-year percentage rate increases for 2014 in the
low single digits in the United States but high-demand business markets,
including San Francisco and Houston, had much higher increases.
U.S. hotel construction
has picked up in the last year. As of April, almost 3,200 hotel projects totaling
more than 380,000 rooms were in some stage of development in the United States,
a 16 percent increase compared with a year prior, according to STR. The number
of rooms under construction in April, totaling more than 100,000, was up nearly
43 percent year over year.
More than two-thirds of
rooms under construction in the United States are in either the upscale
tier—which includes such select-service brands as Hilton Garden Inn and
Courtyard by Marriott—and the upper midprice tier, according to STR senior vice
president Bobby Bowers. About 8,600 of the rooms under construction were in
upper upscale chains, "a distant third among the STR chain scale segments
but up over 24 percent versus the same time last year," Bowers added.
A Fitch Ratings report
issued this month noted that U.S. hotel supply growth was "accelerating
yet manageable," with projected year-over-year supply growth this year of
1.1 percent, well below the long-term average rate of 1.9 percent.
Much of the U.S. hotel
development activity has been concentrated in New York. During Marriott
International's first-quarter earnings call in April, president and CEO Arne
Sorenson noted that revenue per available room growth in the city was a bit
soft, but there were other factors to consider besides supply growth. The city
was hit with a brutal winter this year, and hotels still face tough comparisons
against the prior year, when they had significant extended-stay business
related to the aftermath of Hurricane Sandy.
New York hotel
occupancies still run about 80 percent on average, and adding new
supply—particularly midprice and limited-service hotels—is "good for the
city of New York," Sorenson said. "To add limited-service hotels and
some better affordability for those customers who would like to come to New
York is a very good thing."
Global Outlook
Corporate buyers are
facing a mixture of challenges and opportunity outside of the United States.
Corporate rates in
Europe negotiated for 2014 on average were about flat compared with the prior
year, according to Carlson Wagonlit Travel, but varied by country. Corporate
rates were up in the United Kingdom and France but down in Portugal and Spain,
for example.
In terms of rooms under
construction, the United Kingdom leads the continent with more than 11,000
rooms as of March, according to STR Global. Russia is second with more than
9,000 rooms under construction, followed by Turkey and Germany, each with just
less than 7,000.
Corporate rates on
average also were stable in the Asia/Pacific region but were down in many of
its largest economies, including China, India and Japan, according to CWT.
China has seen
significant hotel development in recent years and also has taken hits to demand
due in part to government austerity programs. Even so, hotel companies see the
country as a continuing area of opportunity in the years ahead. Starwood's van
Paasschen noted the company's first-quarter occupancy in China was up even amid
the government cutbacks and a drop in inbound travel, thanks in part to a
mobilization of call centers and sales teams that target small corporate
accounts.
"We've maintained
for some time that an economy as large and rapidly changing as China's will see
some fits and starts, and while we agree with our owners that the Chinese
economy has many years left to grow, we also recognize that China will need to
make some significant structural changes along the way," he said. "China
will remain a relatively low occupancy market, where our growth will be driven
more by occupancy than rising rates."
The Asia/Pacific
pipeline remains the largest among global regions in terms of total rooms under
development. As of March, more than 2,300 projects totaling 513,443 rooms were
in the region's pipeline, according to STR Global. Several emerging markets
have significant growth planned in the coming years, including Bangladesh,
Myanmar and Indonesia.
In Latin America,
corporate rates on average have been rising, thanks both to booming business
travel in Brazil and steep increases in Venezuela, which is facing inflation
and a recently revalued currency. Corporate rate increases in Brazil for 2014
were more moderate than the prior year, according to CWT, and corporate rates
declined in other such markets as Colombia and Argentina.
Brazil also continues to
dominate Latin America in terms of hotel development. As of March, the nation
had almost 13,000 rooms under construction, more than four times as many as did
Colombia, which has the second-largest share of rooms being built in the
region.
Africa also has been a growing
focus for hotel development among the major multibrand companies. Marriott
International this year closed an agreement to acquire South African hotel
company Protea Hospitality Holdings, giving it 116 hotels in South Africa and
six other African countries. The deal nearly doubled Marriott's distribution in
the Middle East and Africa and made it the largest hotel company in the region.
Wi-Fi Policies Evolve
Even as hotel rates look
set to rise in the foreseeable future, the industry also is showing signs that
charges for wireless Internet access are becoming less of an issue.
While many buyers can
negotiate Internet access fees as part of their corporate rate program, the
paradigm still persists that upper-tier hotels charge for in-room Internet
usage while mid-tier hotels offer it as a rate-inclusive amenity.
In recent years,
however, multibrand hotel companies have begun waiving such fees for elite
members of their loyalty programs.
InterContinental Hotels
Group, which remains the world's largest hotel company in terms of total rooms,
took it a step further this year, making Internet access free at hotels for all
loyalty program members, regardless of status. A few other hotel companies,
including Carlson Rezidor, Omni and Wyndham, already had a similar approach.
Many international brands outside of the United States, including Jumeirah,
Shangri-La and Peninsula, also have elected to include Internet access in basic
rates.
Ultimately, tiered
Internet pricing could become the predominant approach, in which hotels offer
basic Internet access for free but charge a premium for faster speeds needed to
stream movies or other high-bandwidth activities.
'Soft Brands' Proliferate
Some of the
fastest-growing brands in hotel companies today are what the industry calls "soft
brands," collections of hotels that don't adhere to strict brand standards
and designs. While such collections are nothing new for the hotel industry,
considering such groups as Preferred Hotels or Leading Hotels of the World,
they've seen increasing adoption by the multibrand hotel companies in recent
years.
Marriott's Autograph
Collection, for example, grew to more than 60 hotels in fewer than four years.
In about the same period, Choice's Ascend Collection has grown from about 20
hotels to more than 120.
Hilton Worldwide, the
world's second-largest hotel company in terms of number of rooms, soon also
will get in the game.
During the company's
first-quarter earnings call in April, president and CEO Christopher Nassetta
said the company plans to launch this summer a brand that will "aggregate
four-plus-star urban hotels and iconic resort hotels that don't fit in the box
of specified standards of our other brands."
This report originally appeared in the May 26,
2014, edition of Business Travel News.