Rate Negotiability For Corporate Travels In 2001

<B>Rate Negotiability For Corporate Travels In 2001</B>

The recent record-breaking performance of the U.S. lodging market may have many hotel investors and managers in high spirits. Corporate travel buyers, however, may be wondering: Is this ever going to end?

Although the strong hotel market performance in recent years has resulted in high average rate growth, there are still markets where the consumer may have significant negotiating power.

Here, we offer insight on 15 major U.S. hotel markets in terms of rate negotiability for the next booking season. The ratings are based on occupancy and average rate data compiled from Smith Travel Research; the Hotel Valuation Index (HVI), an index developed by HVS International that tracks changes in hotel values; and general market conditions in each area. Individual properties may be more or less affected by the prevailing trends. The following table illustrates our rating system.

Atlanta &shy; Occupancies have remained fairly stable, while average rates have accelerated by roughly 4.0 percent between 1993 and 1999; year-to-date April data indicates a further growth of 4.9 percent. Major conventions were down in 2000, however, an increase is anticipated for 2001. Due to recent supply additions, hotel values are expected to rise by only 2 percent in 2001. The expansion of the Georgia World Congress Center and additions to Hartsfield International Airport may promote Atlanta's popularity, which may result in lower negotiating power in the future. For 2001, however, we don't think Atlanta will see any "Olympic" gains; we therefore rate it as a four-diamond market.





Boston &shy; Historically, high barriers to entry kept HVI and rate growth in Boston significantly above national averages. Various feasibility studies were commissioned recently by the city, which called for the development of additional rooms. As a result, Boston's hotel inventory is expected to increase by more than 30 percent between 1997 and 2003. The completion of the new Boston Convention Center in 2003 and the development of Boston's Seaport District may result in more negotiating power in 2001, as many meeting planners may bypass the city until then. We give Boston a three-diamond rating for 2001.





Chicago &shy; Occupancy and average rate in Chicago increased at an average annual compounded growth rate of 1.0 percent and 6.3 percent, respectively, between 1993 and 1999. As of year-to-date April, occupancy and average rate were up by 6.4 percent and 1.7 percent, respectively. Hotel values in Chicago are expected to rise by 4.0 percent over 2000, thereby yielding some room to negotiate. Next year is expected to be an "off year" for the convention center; hence, a huge supply of rooms will have to be filled by other market segments. We rate Chicago a three-star market.





Dallas &shy; Significant supply additions in 1998 and 1999 resulted in occupancy drops and a rate hike of only 0.3 percent in 1999. Dallas is the only market surveyed that exhibits an actual decline in rate (-0.1 percent) as of year-to-date April. As such, its HVI is expected to drop in 2000 and 2001, by 10.1 percent and 3 percent, respectively. Although the market continues to show signs of economic growth and new developments, such as the 500,000-sq.-ft. expansion of the convention center and the construction of a new sports arena downtown should bode well for local hoteliers, negotiating power for corporate travelers should remain high in 2001. We give Dallas five diamonds.





Denver &shy; There is some leverage involved in negotiating room rates in Denver. Occupancy and average rate have grown at an average annual compounded growth rate of 0.0 percent and 7.1 percent, respectively, between 1993 and 1999 while year-to-date occupancy is down 0.3 percent and rate is up 0.5 percent. Hotel values are expected to increase by 5.0 percent over 2000. New supply in the market is anticipated, although it is not expected to have a considerable impact. The convention center expansion will not open until 2003. We rate Denver a three-star market.





Detroit &shy; The Auto Capital of the World may now become the Las Vegas of the Midwest. Three new casino complexes are expected to be open by 2004 (temporary facilities are currently open). HVI growth in Detroit has registered increases of more than 40 percent annually since 1993. Projections for 2000 and 2001 indicate further gains of 14 percent and 10 percent, respectively. Although some new supply is anticipated for 2000 and 2001, the development of the Downtown area is expected to induce additional demand. We rate Detroit a two-diamond market.





Los Angeles &shy; Unless you are a movie star, you won't get too far in negotiating a room rate in this town. Los Angeles is expected to be hotter than New York in 2001. Hotel values will be up 10 percent over 2000. Occupancy and average rate grew at an average annual compounded growth rate of 2.7 percent and 4.8 percent, respectively, from 1993 to 1999, while year-to-date April information shows occupancy up by 3.5 percent and rate up by 4.9 percent over the same period in 1999. Unfortunately, we must give this market only one diamond.





Miami &shy; The hotel market in Miami is hot. The development of numerous first-class properties in 2000 and 2001 has many local hoteliers questioning the sufficiency of demand. Although Miami's occupancies have remained stable, rates have registered strong growth levels of 6.7 percent between 1993 and 1999. Year-to-date April data, however, shows rate growth decelerating to 1.4 percent. Miami's HVI is expected to increase by 8 percent in 2001. After most of the new supply additions, rate may become more of a negotiating tool. For 2001, we rate Miami a three-diamond market.





New Orleans &shy; The year 2001 will be great for negotiating rates in New Orleans because of a huge influx of hotels opening in 2000 and 2001. Our calculations estimate that the market supply of rooms will increase by about 2,200 rooms in the downtown area during these two years. Most of the impact will be felt in 2001, as the majority of the rooms will enter the market in 2000. Hotel values in this market are expected to grow by 4.0 percent in 2001 over 2000's growth of 5.4 percent. We rate New Orleans a three-diamond market.





New York City &shy; Occupancies and average rates for the lodging market here have increased at an average annual compounded growth rate of 2.6 percent and 7.4 percent, respectively, between 1993 and 1999. With occupancies up 5.0 percent and rates up 5.7 percent as of year-to-date April, it will be difficult to negotiate rates for the 2001 season. The HVI shows average values increasing by 5.3 percent in 2000 and 7.0 percent in 2001, although room supply is expected to grow by 4.1 percent and occupancies should drop slightly below 80 percent. That yields this market a one-diamond rating for 2001.





Orlando &shy; Due to significant supply increases, Orlando's HVI has been decreasing since 1998. Projections for 2000 and 2001 indicate further reductions of 3.0 percent and 2.0 percent, respectively. Orlando's average rate declined by 0.2 percent in 1999, but is expected to rebound in 2000. Commercial and recreational developments, however, should increase lodging demand. For 2001, we rate Orlando a four-diamond market.





Philadelphia &shy; Several years ago, hotel rooms here were hard to come by. After the opening of the Pennsylvania Convention Center, thousands of hotel rooms have entered the market. Consequently, room rate bargaining power for this city is expected to be excellent in 2001. This prediction is based on the fact that the average annual compounded growth of the city's occupancy and average room rate were 1.5 percent and 6.2 percent, respectively, from 1993 to 1999, while hotel values are expected to decline by 8.0 percent in 2000 and by 5.0 percent in 2001. Our rating for this market is four diamonds.





Phoenix &shy; There is no sign of anything rising from the ashes here. Of all of the markets in this article, Phoenix is the best place to negotiate. Occupancy and average rate grew at an average annual compounded growth rate of (1.1 percent) and 4.9 percent, respectively, from 1993 to 1999. Year-to-date April data reveals an occupancy decline of 0.7 percent and a rate growth of 0.4 percent. Too much supply in this market has decreased hotel values by about 14 percent in 2000; values will further decelerate by 12 percent in 2001. These statistics reveal a five-diamond market.





San Francisco &shy; High barriers to entry have kept supply increases relatively low and rates rising here. The popular destination for Asians will become more so as Asia's economy improves. Since 1993, occupancies in this city have remained stable, while average rates have exhibited a strong growth of 7.0 percent. Year-to-date information reveals further hikes in occupancy and rate. According to the HVI, values in this market will be up by about 9.3 percent in 2000 and 7.0 percent in 2001, reiterating the strength of this market. Our rating for San Francisco is one diamond.





Washington, D.C. &shy; Lodging supply in the nation's capital has remained relatively stable since 1993, allowing for a moderate occupancy growth of 1.3 percent and healthy rate growth of 4.4 percent. With occupancies during election years generally stronger, there may be some leverage for discounting rates in 2001. Despite a new wave of hotel development that started in 1999, strong corporate and government demand in the area is not expected to allow for the high negotiability of rates. We therefore rate D.C., as a two-diamond market.





<I>Rebecca Ruf and Erik Warner are senior associates at HVS International, New York.