New U.S. hotel construction nationwide is showing signs of an upturn, but significant new supply will not reach the market until 2006. However, certain individual markets are seeing a higher percentage of new properties opening this year than the overall U.S. average, increasing negotiating leverage for buyers in those areas.
For the first eight months of 2004, new hotel supply in Houston, New Orleans, St. Louis, Orlando and San Diego increased at a much faster rate compared with the same period in 2003 than did growth for the overall United States, according to Smith Travel Research. In Houston, for example, the hotel supply grew 5.5 percent through August. Hotel supply for all of the United States, by contrast, grew a modest 0.9 percent.
More competition in a market invariably results in lower rates and greater negotiating clout for buyers. "Houston, for example, is lagging the pace of recovery we're seeing in other markets and it's due, in part, to the amount of new supply," said John Fox, senior vice president of PKF Consulting.
Patricia Carlin, manager of global travel and corporate card purchasing at Sybase Inc. in Dublin, Calif., is using the opening of new hotels in her headquarters city strategically in negotiations for 2005. Similar to the situation faced by many buyers this year, Carlin's present preferred hotel is asking for rate increases as the market rebounds.
"All of a sudden," Carlin said, "I have some really sweet competition in the neighborhood whose rates are substantially lower than what we would be paying at the hotel we have been using. That will be some leverage for me."
The present hotel is across the street from the Sybase office, but the new entries in the market are within a brief walk, so location is not an obstacle to a Sybase hotel switch.
"More competition absolutely would benefit me," Carlin said. "My existing hotel is aware of it. I told them we have some offers coming in from the new properties. The rate differential is significant."
Whether Sybase ultimately switches hotels is not yet clear, but the new supply provides her with a negotiating edge.
Conversely, buyers seeking negotiated rates in markets that have experienced a decrease in hotel supply in 2004 are less likely to find sales managers ready to offer attractive rates for 2005. Through August, supply in Nashville this year shrunk 1.6 percent, 0.9 percent in Denver and Minneapolis/St. Paul and 0.4 percent in Phoenix, compared with the same period in 2003. Typically, decreases in supply are attributable to hotels that close or are converted to non-hotel uses, primarily residential apartments.
In the second quarter of 2004, 280 new U.S. hotels, accounting for 35,600 rooms, were announced, according to Lodging Econometrics
(BTN, Sept. 6). This represents the highest quarterly new guest room count in more than two years, though the projects will not affect supply until 2006 or beyond, said Lodging Econometrics president Patrick Ford.