Buyers are facing their toughest hotel negotiating
environment in several years, as hoteliers say they’re planning to push for
rate increases amid rising demand and declining supply growth. Analysts,
however, said many buyers would be able to stave off significant increases,
particularly if they offer more flexibility in bargaining for amenities.
Bjorn Hanson, divisional dean of the New York University
Tisch Center for Hospitality, Tourism and Sports Management, said business
travel demand began to make a noticeable improvement in March, but hoteliers
did not respond with rate increases in case it was an aberration. Demand
continued to pick up from April through July, even though business travel
recoveries generally happen not in the summer but in the fall or spring, so
hotels will be coming to the table in a stronger position this year, he said.
“Buyers should prepare for the most aggressive negotiating
posture in three years,” Hanson said. “In discussions three or four months ago,
the thought was there would be a small increase, if any, in rates in 2011. This
increased amount of business travel has shifted the balance of power.”
As multi-brand hotel companies reported their second-quarter
results, many of which came in stronger than expected, top executives confirmed
that buyers should prepare for requests for increases at the negotiating table.
Marriott International president and COO Arne Sorenson said in a conference
call to investors that his company is preparing corporate buyers for rate
increases when it begins negotiations later this summer, “including in many
cases significant increases.”
“While it’s a bit early to quantify the increase in 2011
with strengthening demand, our customers know that today’s prices are not
sustainable,” Sorenson said. “They recognize that to provide the best quality
service, availability, amenities and facilities, hotels need to be able to
charge a fair price.”
In Starwood Hotels & Resorts’ earnings call, vice
chairman and CFO Vasant Prabhu said his company would like to see a return to
pre-recession rates over a two- or three-year period and would be seeking
increases in the high single digits in its negotiations. “Of course, it is case
by case in negotiations,” Prabhu said. “It also depends on what the rest of the
industry is doing, but that’s our intent.”
Timing for negotiations also is a challenge for buyers this
year. As of early August, most buyers had not begun negotiations, said Bob
Brindley, vice president of BCD Travel consulting division Advito. Many buyers
are reluctant to be in the first wave of negotiations, hoping the early birds
would talk down some of the proposed increases, he said.
Egencia vice president of supplier negotiations Noah Tratt,
however, said his clients are eager to start negotiating in case the hotel
demand outlook continues to improve. Likewise, some hotels want to wait until
the outlook is clearer, while others are ready to negotiate in case the demand
improvement reverses, he said.
“Hotels are trying to take the temperature, but there’s a
sense that it could get worse,” Tratt said. “There’s just as much uncertainty
as there is optimism.”
Buyers will face the toughest time in major markets such as
New York, Chicago and Los Angeles, NYU’s Hanson said. Starwood president and
CEO Frits van Paasschen said that during June, midweek occupancy levels topped
90 percent for the company’s properties in New York, Boston and Chicago and
reached 98 percent in London. Smith Travel Research also reported that New York
average daily rates increased by 15.4 percent year over year in June.
Buyers might be able to mitigate that trend by talking with
new hotels that have opened in those regions, many of which will be eager for
business, Tratt said. In New York, for example, Starwood plans to open seven
hotels this year, and InterContinental Hotels & Resorts in June opened a
new 36-story property in Times Square.
Rate negotiations will be easier in convention-heavy cities,
such as Las Vegas and Orlando, Brindley said, as meetings demand recovery has
been less robust. Outside of the major cities, Europe’s recovery also has been
tepid, he said.
Buyers will face the largest potential increases in the
upper upscale and luxury tiers. Smith Travel Research reported that luxury hotel
rates in the United States were up 4.7 percent year over year in June, the
largest increase among the tiers. Economy hotel rates, however, were down by
3.2 percent year over year, and midprice rates also were down slightly.
Hanson said considering the deep discounts seen in the
luxury tier over the past two years, any increases will still keep rates well
below pre-recession levels. “Luxury will continue to be a great deal, even
though it won’t be as great of a deal as it’s been,” he said. “It will take the
longest to recover to its 2007 levels.” Hotels this year likely will hold rates
steady if buyers agree to unbundle such amenities as parking or breakfast, he
said.
While consolidating hotel programs has been the trend over
the past few years, Advito’s Brindley this year is advising buyers to add
properties to their solicitation list.
“They’ll still drive most demand to their top premium
partners,” he said, “but there’s going to be a need for secondary hotels in the
program.”
This story originally
appeared in the August 9, 2010, edition of Business Travel News.