Global Hotel Rates, Demand Continue to Rise

Despite anticipated economic decline in the United States, hotel companies generally were unscathed and announced profits for the fourth quarter. The continued strong performance is partly a result, once again, of surging demand in both traditional business-oriented destinations and emerging markets, which led to higher average daily rates nearly across the board. Those trends likely will continue this year--though possibly at a slower pace--and pressure corporate travel budgets.

In the Americas, increased corporate activity--notably from New York's banking and finance sector--led to higher occupancies and, for a fourth consecutive year, higher business travel room rates, according to HRG. Based on industry figures and rates paid by its U.K. clients, HRG found that New York hotel rates increased 11 percent during 2007, to US$384.21 (but just 2 percent in British pounds, to £191.93), maintaining the city's ranking as the world's second most expensive city. "With persistent worries surrounding a potential U.S. recession, it remains to be seen whether the resilience of New York's room rates will continue into 2008," according to HRG.

For the third consecutive year, Moscow was listed by HRG as the most expensive destination, with the average room rate increasing 11 percent, to US$482.76 (£247.99). Since 2004, Moscow's average rate has soared 93 percent.

"The hotel industry has shown strong performance throughout 2007--although not to the levels of 2006, with many key cities achieving single as opposed to double-digit [rate] growth," said HRG director of global hotel relations Margaret Bowler.

Some newly industrialized markets again had the highest percent increase in rates, including Mumbai (37 percent). Supply shortages and growing demand in such destinations as Dubai, Mumbai and Moscow have fueled the rate hikes ( see chart below).

Rates also have risen in many other destinations. Overall, HRG found that only five of 50 surveyed cities showed declines in 2007: Bangalore, Bristol, Liverpool, Philadelphia and Tokyo. "As the industry continues to grow there is a marked increase in the shortage of rooms, with availability posing an ongoing challenge in certain cities," HRG explained.

Given the demand strength in many regions, hotel companies continue to operate a robust pipeline of new construction, especially outside the United States. That, executives said, would help shield global chains from a U.S. economic slowdown.

Starwood Hotels and Resorts, for example, said half of the 500 properties in its pipeline are outside the United States, including many in the upper-upscale and luxury segments. For 2008, most new openings will be in Asia and the Middle East. At Marriott International, 25 percent of new hotel rooms in 2007 opened outside the United States.

Even in North America, 2008 corporate rates appear to be on the rise again. Starwood CFO Vasant Prabhu in late January said that corporate rates, which typically account for 15 percent of room nights in North America, were up 6 percent to 7 percent for 2008 contracts. With 75 percent of the year's group business already booked, rates were up 5 percent, he added. "We think of it as a tale of two cities," said Prabhu. "What we read in the newspapers is not what we see in the business."

HRG's Bowler said fears of a global recession would "preoccupy many industries; however, it is clear that the interconnectivity of world markets makes corporate travel a necessity, which businesses cannot ignore. We anticipate that 2008 will be a year of further growth for the global hotel industry, although some markets may experience a temporary slowdown in the growth of average room rates. However, suppliers are expected to maintain average rates as supply and demand balance out. Hotels are indicating that even if occupancy levels dip slightly in the short term, they are looking to protect average room rates through aggressive yield management."