Demand Growth Ebbs, But NYC Hotel Rates Soar

The rise in hotel room rates throughout the United States reached its crescendo this year in New York City, where average daily rates consistently spilled over the $200 mark. Bearing the brunt are corporate travel buyers who, because New York is rife with some of the biggest, most important companies in the world, are compelled to negotiate for rates at a table conspicuously skewed toward hotel suppliers.

According to Smith Travel Research, as of July, New York's year-to-date average daily rate stood at a robust $215.05. Comparatively, the aggregate average daily rate for the entire United States as of the end of August was just over $95. Coupled with an occupancy rate of over 80 percent and dragging supply growth, New York is a very difficult market for business travel. "Supply growth is low; demand is increasing, which in turn increases occupancies, which drives higher rates," said Jan Freitag, vice president of Hendersonville, Tenn.-based Smith Travel Research, a provider of lodging industry data.

While Freitag's declaration could double as an Economy 101 lecture, the data and logistics of New York City back his sentiment. "New York City is a small, confined market with slow growth," added Freitag. "There is very little room to build and if you have a piece of land, you probably build condos now versus hotels, so there is not a lot of new supply coming on line. Right now, it is smooth sailing for hotel operators, which is not good news for corporate travel managers in terms of negotiations."

BCD Travel vice president of hotel relations and travel procurement services Maria Chevalier said, "Occupancy levels in New York are high, as are rates. New York's a fascinating market. I call it the perfect storm. You have to get very creative."

One travel buyer has done just that. "In New York, we have a negotiated membership with Club Quarters and we get a really great rate at those properties," said Brenda Miller, purchasing manager of travel services for confectionary maker Nestle. Club Quarters are private, full-service hotels designed specifically for business travelers, with locations in New York, Boston, Chicago, Washington, D.C., Philadelphia, Houston, San Francisco and London. "We have a chainwide membership with them, which affords us a chainwide discount," added Miller. "It's really a great deal."

Luckily for Randy LaBouve, supervisor of gas and oil company ConocoPhillips' international travel & global hotel program, he doesn't have a great portion of volume in New York. "We rely a lot on consortium rates when we are there, which helps to keep costs down," he said.

Yet, there is only so much a travel buyer can do in New York to keep costs at bay. "There are no bargains in New York City," said Freitag, "only less expensive rooms on the shoulder nights." Most business travel is concentrated on Tuesday and Wednesday, so room rates tend to be higher on these nights. However, traveling on other days may, in fact, deflect some cost. "Adjusting business travel to shoulder nights is a valid strategy when feasible, but often it is not," said BCD's Chevalier. "If you are going to visit a client, how much can you adjust? Sometimes it can't be predicted or controlled."

Chevalier and PricewaterhouseCoopers hospitality and leisure head Bjorn Hanson agreed that corporate travel rates will again increase in 2007, around 6 percent. While this number takes into account rates across the country, New York's percentage rate increase will be much higher, into double-digit percentages. Hanson said rates in New York likely would be up 15 percent year over year, mainly due to the rise in demand from business travelers, which Hanson said propels hoteliers to raise rates.

Record-level occupancy rates are having an effect, as well. "Because hoteliers can't increase their revenues by filling more rooms, they're doing their best to increase their revenues by charging a lot more," said Sean Hennessey, president of New York-based Lodging Investment Advisors. "Room rate growth is accelerating from where it was a year ago." According to Smith Travel, rates are up 12.6 percent over last year. This upsurge in rates is nowhere more noticeable than in the deluxe tier. Just this May, New York deluxe chain rates reached an astonishing average of $442.28, according to Smith Travel.

Furthermore, last December, the average daily deluxe rate in Manhattan was a numbing $512.29, and that was before New York taxes were heaped on, which may have corporate travel buyers again staring at the grinch this holiday season.

As dire the situation in New York appears, at the very least it has aided outlying hotel properties, which before weren't cashing in at the same clip as their Manhattan brethren. Extreme occupancy rates in New York City have spurred a spillover effect, in which properties in areas outside the New York metro area are rewarded with travelers that can't find a room in the city. "There is more demand that could be accommodated if there were more rooms in the city," said Lodging Investment Advisors' Hennessey, "but right now we are starting to see hotels in the surrounding areas—Northern New Jersey, LaGuardia Airport, Kennedy Airport, White Plains—get a boost in their occupancies. Their profits are starting to improve as the compression from New York City spreads out. It's been a long time coming for those properties, they haven't shared in the rebound as Manhattan has, but it's starting to become more evident that they are benefiting in that way."

Relief, however, soon may be in sight for travel buyers. While the remainder of this year and 2007 look bullish for hotel operators in New York, the back end of the decade may swing back in favor of buyers. "There may be relief in 2008," said BCD's Chevalier, banking on new supply coming on-line then, easing occupancy rates. According to Lodging Econometrics, a Portsmouth, N.H.-based company specializing in U.S. lodging development, New York had one of the largest construction pipelines of any domestic city as of the close of this year's second quarter, with 57 projects totaling 7,729 rooms. Lodging Econometrics predicted that new hotels coming on-line in 2007 would be readily absorbed in New York, but further down the line was still unclear.

With supply sprouting in New York, the question is whether hotel operators will drop rates to make up for dips in occupancy. "If supply goes up, demand and occupancies flatten, then what happens to rate?" said Smith Travel's Freitag. The answer may dampen travel buyer hopes. "Historically, operators don't build occupancies by cutting rates," Freitag said. "It's better financially to keep rates up and take a slight hit in occupancy."