Growing business travel demand, high occupancy expectations and stunted supply growth are creating difficult market conditions for travel managers in many of the top business travel cities.
As recent hotel negotiating generally proves tougher for buyers than in past years, some experts advised that market-by-market hotel deals could yield more beneficial results.
Like the U.S. lodging market at large, the top business travel markets are expected to see across-the-board growth in RevPAR—with growing rates and occupancy making major contributions.
Citing market-specific research reports issued this month by PKF Hospitality Research, executive managing director Mark Woodworth said that Los Angeles, Atlanta and Chicago are expected to be the fastest-growing RevPAR cities in 2006, while Denver, Dallas and Orlando are at or below national average projections. While all of the top business travel markets are in some phase of recovery, New York and Washington, D.C., already have surpassed 2000 occupancy and rate levels.
Woodworth said that occupancy and, more importantly, rate increases are driving the ongoing recovery for almost every market. "If you look at what makes up the RevPAR growth, in virtually all cases more than half of it is due to increases in room rate," Woodworth said. "The vast majority of markets are still in the recovery mode in terms of RevPAR. A few markets are arguably fully recovered—that's D.C. and New York," Woodworth said. "There are slower recovery markets—they would include Atlanta and Dallas and Denver."
Hilton vice president of business travel sales Denise Lodrige-Kover said, "You can only charge what the marketplace will bear." However, it looks as though the marketplaces in many of the top business travel destinations will bear higher-than-average rates for buyers.
With an expected 7.7 percent jump in RevPAR next year, Los Angeles is poised to see the most dramatic growth among the top business travel cities. Like many business travel markets, Los Angeles continues to be the beneficiary of demand. For the first six months this year, the city's hotel market witnessed a year-over-year 6.9 percent jump in average daily rate and a 4.2 percent rise in occupancy, Ernst & Young's Hospitality Services Group said in a report released last month.
Like much of the overall U.S. hotel market, the Los Angeles hotel pipeline has been dry during the past year, further exacerbating the negotiating climate for buyers.
Although the city has 11 hotels totaling 874 rooms slated to open by the end of 2008, "no new hotels opened in the city of Los Angeles in the first six months," the Ernst & Young report said.
Limited supply growth is a common thread throughout much of the U.S. lodging industry. "There's virtually no market that can report any construction activity levels that come remotely close to their long-term average," PKF's Woodworth said.
As the lack of supply growth exacerbates pricing pressure on travel buyers, Woodworth said there is a large number of deals in the works that would expand supply in many markets. However, high construction costs continue to plague any development momentum.
"What's interesting is a number of chains have said they're reporting record levels of development activity in their pipelines, but my own expectation is that we'll see record levels of deals that just don't get done," Woodworth said. "Every component that goes into developing a new hotel has experienced and continues to experience very significant increases in cost: construction material, land and, as interest rates go up, the cost of capital. The cost bar keeps going up."
In addition to receiving minimal room inventory additions, Woodworth said such markets as Washington, D.C., and New York also have lost rooms due to condominium and other conversions.
New York boasts all of the characteristics that make suppliers content and buyers nervous: record occupancies, limited supply growth and growing rates. HVS International this summer quantified the market's performance and also gave a look ahead, saying that by the end of this year, Manhattan's occupancy levels and average rates will exceed those of 2000. "The Manhattan market showed very robust increases in 2004 and is forecast to achieve a RevPAR increase of nearly 17 percent by year-end 2005," HVS said in the report.
Although Marriott CEO J.W. Marriott Jr. during the company's third-quarter conference call this month said, "Transient demand was strong in most markets around the world," the company in its earnings report singled out such markets as New York and Washington, D.C., as particularly strong.
Having witnessed a strong return of occupancy, such markets experience acute pressure on last-room availability agreements, for which many hoteliers can charge a premium.
"The New York market is on fire," said Tom Chevins, senior vice president of sales and marketing at Omni. "There has been efforts underway to take away last-room availability and some of those things and you're probably going to see more of that in the marketplace on a go-forward basis."
However, where rates grow exorbitantly, Woodworth anticipates some backlash among business travelers and their managers.
"When we look at markets like a D.C. and a New York that have had extremely strong rate growth in the past couple of years, even though we're not seeing meaningful supply growth, we do see occupancies and eventually rates begin to flatten out a little bit because there is a point where the consumer says, 'I can't go any more,' " Woodworth said. "They'll either trade down from a four-star property and stay in a three, or instead of flying out the night before, may catch the early bird and save a night's lodging. They can affect occupancy and the level of rate increase."
"Some of the markets that may have some supply yet to be absorbed are potentially Chicago, Houston or Dallas," said Ruth Philpott, director of hotel procurement for Eclipse Advisors. "There's also the acknowledgement of the downdraft of Katrina and the need to rebook conventions that were to be held in New Orleans."
Hurricane Katrina aside, Atlanta also is poised for significant growth with an expected 7.1 percent jump in RevPAR next year. Yet, Woodworth said it is largely due to the fact that the city has been behind other major markets in terms of lodging recovery.
"Atlanta has very much lagged behind the national averages in terms of its recovery," Woodworth said. "We're forecasting Atlanta to have such a strong increase in RevPAR next year, particularly relative to the other top 10 markets, it's obviously based in part of economic growth in the metro area next year, but also because Atlanta is still playing catch-up."
Patricia Carlin, travel manager at Sybase, said that when it comes time to negotiate she will do so on the property level, rather than attempt chainwide deals. Carlin said in the past, the approach has yielded more favorable rates for her travelers.
"Everything is going to be very market-specific," said Kim Maschoff, WorldTravel BTI Travel Procurement Solutions director of hotel business consulting. "That's the challenge and this will be one of the challenges that we will have this year. We have to look at different markets and understand what we can do in that market. Between 2001 and 2003, it was more across the whole program."