Hotel Rates Soften On Occupancy Dip

<B>Hotel Rates Soften On Occupancy Dip</B>

By Bruce Serlen

U.S. hotel occupancy rates dropped significantly enough during the first quarter that hotel execs last week conceded that the tide has shifted toward buyers for the first time in many years.

Both occupancy and revenue per available room numbers for January and February softened, and March results are expected to be even weaker, which has given some travel managers more buying power.

Buyers recently reported that hotel companies have resorted to renegotiating room rates in return for greater market share, even in such a previously hot market as Silicon Valley.

"With the failure of so many dot-com companies, hotels in the Valley suddenly find themselves with much more availability than anticipated, certainly in non-peak periods," said one Corporate Travel 100 buyer. "As a result, in return for bringing an increased market share of our business to the hotel, they were prepared to cut our negotiated rate." Three other CT 100 buyers, two based on the West Coast, reported similar approaches in the past few weeks.

No hotel company acknowledged reopening negotiations in this way. However, corporate sales executives did say they were amenable to working with clients to provide extra value--short of lowering rates--in these top markets in return for greater market share, a scenario that would have been unheard of a year or even six months ago.

In an economic downturn, there's also the chance that buyers who are accustomed to booking full-service hotels will trade down to midprice or economy alternatives to accrue savings quickly. The consensus is that this belt tightening is occurring now as well.

In February, U.S. occupancy rates fell 1 percent over the prior year, to 60.6 percent, according to Smith Travel Research. While the decrease seems relatively minor nationwide, certain key markets that consistently had been strong performers in 1999 and 2000 saw more precipitous drops. For example, San Francisco/San Mateo, which includes Silicon Valley, saw occupancy rates plummet 11.7 percent in February over the same period in 2000. New York and Boston also experienced significant occupancy declines of 6 percent and 4 percent, respectively.

As the national economy worsened last month, Bjorn Hanson, head of PricewaterhouseCoopers' hospitality and leisure practice, also revised his industry forecast downward. He predicted that the industry's 2001 RevPAR growth would be 2.8 percent, just above the rate of inflation and the weakest since 1992.

"There's definitely been some softening of demand, but we're finding it's confined to certain markets, rather than across the board at this point," said Kevin Kelly, vice president of business travel for Wyndham International. "Much of the decision on choosing a hotel is location-driven, so properties in the most advantageous locations in a destination have held up the best, assuming they're priced competitively."

The softening has affected business travel much more than leisure travel. "There's been a particular emphasis on the corporate market," said Tom Klein, senior vice president of the Americas at Swiss&ocirc;tel Hotels & Resorts. "We've started to see less travel combined with increased pressure on pricing as more rooms become available in the market."

Technology-related companies, in particular, have scaled back their travel and that's having a ripple effect. "Properties in destinations with a concentration of technology businesses have been vulnerable," said Ty Helms, vice president of sales at Hyatt Hotels Corp.

Booking cycles also are showing signs of softening. "As a result, it's become more difficult to make long-term business forecasts," Klein said. "Accounts are looking to realize savings like most of Corporate America, and travel is the first thing they look at to achieve savings."

In key markets, where demand had been consistently strong a year ago, midweek nights have remained strong.

"In the case of Silicon Valley, there had been such extreme demand that even with a softening, hotels can still do well Tuesday and Wednesday nights," Kelly said.

While a number of areas around the country have shown weakness, pockets of strength remain. Washington, D.C., and Chicago, for example, have held their own, said Rodger MacDonald, vice president of strategic sales for Destination Hotels & Resorts.

With the shortened booking cycle, it's also been much easier in certain markets to reserve a room relatively late.

"It's often possible to get a reservation up to arrival day, which would have been near impossible a year ago," MacDonald said.

Hotel executives described the overall market right now as cautious. "We're not seeing the fevered pitch of a year ago," MacDonald said. "Volumes have been relatively strong, but there hasn't been the same intensity."

Travel managers are watching the market closely, they said. "They understand it is in a slower mode than last year and are proceeding hesitantly," said Allan Kane, vice president of sales at Choice International.

If the balance between buyers and sellers has changed, the shift has been subtle. "The market appears to be shifting from what was a very vibrant seller's market to a more equal one between buyers and sellers," said Mike Leven, chairman and CEO of U.S. Franchise Systems, whose brands include Hawthorn Suites and Microtel Inns & Suites.

Some trading down from full-service to midprice or economy is inevitable in this kind of atmosphere. "January and February turned out to be strong in the midmarket segment," Kane said.

Similarly, many deluxe hotels have held stable. "High-end travelers at our Park Hyatt properties, for example, have been less affected," Helms said.

The compression started with the upscale brands and worked downward. "In many cases, companies have told their people, 'Either travel less or, if you have to stay in front of your customers, do more and spend less,' " said Ronald Roy, vice president of business travel and distribution for the Americas division of Sol Melia Hotels and Resorts.

In times of economic stress, midmarket and economy brands tend to do slightly better, said Leven. "But this time, the whole industry has experienced more difficulty. I wouldn't want to leave the impression that this represents massive opportunity for any segment because it represents a shift from seller to buyer and that affects all segments," he said.

While no hotel companies admitted renegotiating rates, they said they were prepared to cooperate with customers for the good of the long-term relationship. "The fact remains that we have to work closer with our clients to ensure we retain their business," Swiss&ocirc;tel's Klein said.

Alternatives to rate reductions were likely to be put on the table first. "Right now, lowering rates is a topic of conversation, but no concrete action has yet been taken," MacDonald said. Travel buyers are more apt to see value-added incentives thrown in, such as free breakfast or upgrades to deluxe rooms, before they see rate reductions, he said.

Looking further down the road, hotel companies are more optimistic. "By the third quarter, we expect to see signs of strength returning to the market," MacDonald said.

Projections for the second and third quarters actually may be ahead of last year, "but we're not seeing the huge growth of previous years," Helms said.

The first quarter, the hotel companies pointed out, is typically quiet. "It's generally the slowest time of the year," Kelly said. "Granted, the environment right now is very challenging, but we need to keep things in perspective.