Hotel Pricing Power To Remain Strong Despite Downturn, Analysts Predict

While an economic downturn will hinder the lodging industry seller's market, it will neither heavily affect the tiers of most interest to travel buyers, nor the domestic markets in which buyers have seen the sharpest rate increases, industry analysts said this week.

"While there's certainly going to be a downturn, it's going to affect the lodging industry in a significantly different way than in the past," said lodging industry analyst Mark Lomanno, president of Smith Travel Research on Tuesday at the National Business Travel Association's Business Travel Financial Forum in New York. "It's going to affect the most price-sensitive parts of the market first and the secondary and tertiary markets first."

Demand growth has been sluggish in the top 25 domestic hotel markets, which represent 42 percent of domestic hotel revenue overall, during the past two year, but that's largely because they mostly are running at high capacity and have little room for demand growth, Lomanno said. "Even though there's new construction and new supply, it's likely to be absorbed at a reasonable pace," he said.

At the same time, rate growth in those markets has been steadily increasing more quickly than the other markets, unlike the most recent hotel industry downturn at the beginning of the decade, when there was a visible drop in the rates in those markets, he said.

Lomanno also said economy-induced travel cutbacks largely would hit the lower tiers, not the upscale and luxury tiers. "The cost-conscious consumer will be cutting back," he said. "All these reinforce the fact that the short to midterm effect will hit the industry from the bottom up."

For the first 60 days of this year, daily room demand growth has been slight, at 0.3 percent, and occupancy has dropped by 1.7 percent, according to Smith Travel Research. Average daily rates, however, still have grown by 5.2 percent, which Lomanno said indicates that hoteliers are testing a method of not reacting to a slowdown with price cuts as they have in the past.

In the next few years, overall rates will continue to increase, although not quite at the steep levels seen in 2006 and 2007, said Bjorn Hanson, hospitality and leisure group principal at PricewaterhouseCoopers. The firm projects a 5.4 percent increase in average daily rate this year and a 4.5 percent increase in 2009, compared with the recent high of 7.5 percent in 2006.

Like Lomanno, Hanson said the luxury, upscale and midprice without food and beverage tiers would be seeing rate increases near or above the overall average in 2008 and 2009 while economy tier increases would be below average. Hanson also concurred that there's little relief on the horizon in the most difficult negotiating markets. "Availability will still be at a premium in the top markets, and rates will be increasing," Hanson said.

Hotels also will continue to increase the fees and surcharges imposed on guests, Hanson said. In 2007, the industry collected $1.75 billion in such fees and surcharges as minibar restocking fees, baggage holding fees, Internet service and increased fax charges, he said. "This number has been growing every year since 2002," Hanson said.

Still, although the fee and surcharge growth has been in the 12 to 15 percent range in recent years, the growth should begin to stabilize below the 10 percent range, Hanson said.