Negotiated U.S. hotel rates for 2005 are expected to rise 3.5 percent over 2004, according to projections released last week by PricewaterhouseCoopers. PwC also said that average negotiated rates for 2004, which were determined in late 2003, rose approximately 1.9 percent, compared with the prior year. By contrast, average daily U.S. rates—which include corporate, consortia, negotiated and rack rates—this year are expected to go up 3 percent.
The 1.1 percent differential in average daily rate between 2004 negotiated rates and estimated rate increases for the year can be attributed to two factors, said Bjorn Hanson, head of PwC's hospitality and leisure practice. "The first was timing," he said. "Travel buyers finalized their 2004 rates in the fourth quarter of 2003, before the industry rebound in occupancy and room revenues that we're experiencing now had gained traction. In hindsight, they were able to lock in quite favorable rates in many cases. Second, buyers tend to have more leverage generally because of the volume projections they make to their preferred hotels."
PwC's 2005 estimate—that negotiated rates will rise 3.5 percent—reflects analysts' expectation that occupancy and revenues will continue to improve further through 2004.
Stephen Rushmore, president of valuation firm HVS International, this month offered projections equally bullish for hotel managers, if not for travel buyers
(see story). From 2001 through 2004, buyers were able to negotiate mostly minimal price increases, even as their travel volumes fell.
"Room rates should rise at two times the consumer price index," Rushmore said at the NYU Hospitality Investment Conference in New York. The CPI, which increased 2.3 percent in 2003, is expected to rise another 2.1 percent in 2004. This would mean ADR increases in the area of 4 percent going into 2005.
Smith Travel Research projections were more modest than either PwC or HVS. Speaking at the NYU meeting, president Randy Smith said ADR was likely to rise 2.4 percent this year.
Neither Rushmore nor Smith distinguished between negotiated and other rate types. Negotiated rates typically are a discount off the consortia rate, which in turn is a discount—usually 10 percent—off the hotel's corporate rate. Complicating matters this year, two leading providers of consortia rates, American Express and Marriott International, moved from a fixed model to a dynamic one
(BTN, Nov. 10, 2003)."The rates we're able to negotiate will depend on the relationships we've put in place, especially with hotels in our key markets," said Bill Davidson, manager of corporate travel and meeting services for International Sematech in Austin, Texas. "Because this is where we bring the most room rates, the hotels know they can count on the production being there."
Buyers who consolidated their hotel programs during the downturn in order to deliver more marketshare to select suppliers are sticking with the strategy. "We'll continue with this kind of consolidated program to ensure pricing," said Jim Haddow, chief of global procurement at A.T. Kearney in Alexandria, Va.
Hotels are monitoring production against buyers' room night projections much more closely this year in anticipation of negotiations for 2005, according to Heidi Sanderson, senior hotel procurement consultant for Eclipse Advisors. "Hotels have the sense they may be able to recoup some lost ground next year," she said.
Buyers who enjoyed those minimal increases during the past few years may be in for a surprise. "You could argue that buyers will do better negotiating earlier in the fall as rates still are firming up," said Kim Maschoff, senior consultant at Consulting Strategies. "On the other hand, hotels might hesitate to offer their best deals until they see how things look in November and December."
While HVS and STR projections are national in scope, both Rushmore and Smith noted that rate increases still are market sensitive. "Increases double the increases in the CPI are likely in most markets, but not all," Rushmore said. Smith termed the recovery inconsistent, both in terms of markets and lodging segments.
According to HVS, markets such as Las Vegas, Miami and San Diego saw the steepest increase in hotel value in 2003, so the pressure on rates should be greatest in those cities. At the other end of the spectrum, however, hotels in Salt Lake City, Boston and San Jose experienced the steepest decline in value in 2003, meaning travel buyers still will hold the upper hand in negotiations there.
STR also measures the strength of the market in terms of new supply growth and here too Smith is bullish on the industry being able to extract higher rates going forward. "Demand is projected to increase 4 percent in 2004, while supply growth rises only 1.2 percent," he said.
PwC's Hanson expects the upcoming negotiating season to be the hardest since 2000. "The lodging industry is starting to believe that things really have turned. There's a sense, whether it's real or not, of a coming change in the balance of power," he said.
Owners of full service hotels—the segment still of most interest to travel buyers—are most likely to harbor this perspective. "Owners in this segment tend to be most sophisticated in terms of the economy and consumer demand and have the most discipline. "Accordingly, they're more willing to say on an institutional basis, 'We're going to hold out for rate this time,' " Hanson said.
Owners of full service hotels also are facing significant costs for maintenance and capital improvements that many deferred during the downturn. Optimizing rate increases is a way to help cover these expenses, Hanson noted.
Wall Street lodging analysts UBS' Keith Mills and JPMorgan Chase's Harry Curtis see higher rates as part of a larger bullish scenario. "Lodging demand recovery is underway, especially in regard to transient business travel," Mills said last week. "The industry seems to be in the early phase of a multi-year recovery."
Curtis this month surveyed rates in eight cities and said that he found "rates for July accelerating 16.4 percent versus 12.6 percent in June and 7.7 percent in May. The key is the sequential strength."