Demand growth continues to outpace supply growth in the U.S. hotel market, leaving travel buyers in greater need of last-room availability and suppliers more likely to place higher premiums—or even limitations—on LRA agreements. With lodging supply meeting further pressure from hurricanes, condo conversions and a construction pipeline that has slowed to a trickle, the past decade witnessed a rash of consolidation and acquisition—placing larger swaths of hotel inventory in fewer hands.
"Availability is definitely an issue this year," said Eclipse Advisors director of hotel procurement Ruth Philpott. "Occupancies are much higher and they're forecasted to be much higher at year's end than they have in the recent past."
According to figures provided by Smith Travel Research and cited last week by the Travel Industry Association of America during its travel forecast, hotel demand has been growing at a faster rate than supply in recent years and is anticipated to continue into 2006. At a time when supply grew nominally—at 1.1 percent, 0.7 percent, 0.4 percent and 1.5 percent in 2003, 2004, 2005 and forecasted for 2006, respectively—demand grew at a healthier pace of 1.4 percent, 4.4 percent and 3.6 percent in 2003, 2004, and 2005 and 3 percent for next year.
"New room supply growth continues to hover at historically low levels, constricted further by hurricane closings, while solid demand growth continues," said Smith Travel Research president Mark Lomanno.
PKF Hospitality Research executive managing director Mark Woodworth added, "There's virtually no market—certainly the major business travel markets—that can report any construction activity levels that come remotely close to their long-term average."
Hotels in the past have been willing to offer LRA to preferred clients at no extra charge, yet for 2005 they sought a premium. The attitude shift continues for next year as hoteliers adamantly define last-room availability by room type, rather than run of house as some buyers were able to negotiate during the past few years.
"There comes a point in the cycle when availability is more important than price," said Christie Hicks, Starwood Hotels & Resorts senior vice president of worldwide sales. The supply and demand dynamic is creating such a point.
"There is a premium placed on LRA. With supply not growing at the rate of demand, it obviously causes an inequity," Hicks said, adding that clients to varying degrees are opting for a higher LRA rate in favor of the lower non-LRA rate. "Our largest accounts are absolutely favoring LRA rates," she said. "Our smaller accounts are willing to get a lower rate by not having LRA."
Maria Chevalier, vice president of hotel relations at WorldTravel BTI's Travel Procurement Solutions division, said companies are weighing the cost-benefit relationship of last-room availability agreements more carefully this year. "They're weighing LRA a lot more, since there is a premium placed on that," Chevalier said "There are a lot more analytics around that than ever before, because you're determining if that's something you need and will use."
"For certain buyers and in certain markets, the last-room availability feature is definitely worth the premium because it does allow for some downside protection when availability is tight or prices are escalating," added Eclipse Advisors' Philpott.
BDO Seidman director of procurement and travel management Cindy Gillen said the decision to pursue LRA rates has become market-specific. LRA becomes more important in markets with high occupancies and limited supply
(BTN, Oct. 7)."There are cities where LRA is worth having, and we've been discussing a lot whether it's worth paying a little more for LRA," she said. "That's a decision that will come up more frequently this year. In certain markets, it's very important."
"It's very difficult this year," said F. Schumacher & Co. travel manager Cheryl Sanborn of this year's hotel negotiating climate. "All the hotels in our program wanted more money and nobody wanted to give us LRA. In the end, we were able to negotiate a win-win. We've been with many properties for a while and have the relationships and that definitely helps."
Although demand growth continues to outpace that of hotel supply, the top 10 hotel companies have grown their portfolios dramatically in the past decade, according to historical data compiled by MKG Consulting and released late last month. While a quick look at the numbers would suggest a boom in new supply since 1995—Hilton grew its inventory of rooms by 283 percent, Marriott by 154 percent—MKG said, "Mergers and acquisitions have been the preferred means for achieving hotel growth for the big international groups." This produces another complication for buyers—more properties now lie in fewer hands.
"There's so much consolidation, reflagging and rebranding that it's hard to know who you're working with," noted Sanborn.
"Supply issues will easily last until 2007 or 2008 before we get any real relief," said WorldTravel's Chevalier. "Predictions are pretty consistent that it's going to be relatively flat, with maybe 1 percent or 2 percent gains, which is not enough to impact demand increases."