Building on a trend established last year, full-service and higher-tier hotels have experienced strong gains in occupancy and revenue this year as the return of the business traveler collides with what analysts contend is limited growth in room supply, particularly in downtown urban markets. Corresponding with the success of upper-tier hotel companies and the laws of supply and demand, year-over-year average daily room rates are expected to rise through 2007.
The recent positive performance in this segment, especially when compared with lower-tier hotel segments, follows three years of negative RevPAR growth beginning in 2001. Last year, RevPAR in the segment grew 8.9 percent and this year another 6.4 percent in growth is expected, according to data provided by Smith Travel Research and PricewaterhouseCoopers. PwC expects another 3.9 percent growth in 2006 and 2.9 percent on top of that in 2007.
Meanwhile, RevPAR in the upper upscale segment, following similar downward RevPAR trends between 2001 and 2003, grew 8.9 percent last year, with growth anticipated to continue upward at a pace of 8.3 percent this year and 7.4 percent for 2006.
"In New York City and in other key urban markets, we believe the driving force behind luxury and upper upscale RevPAR growth is a lack of new room supply in the segment coupled with strong demand," said JPMorgan Chase analyst Harry Curtis.
Although Marriott has a couple of upscale projects in the works, "Projects in these categories tend to be mixed use and are typically smaller hotels," a spokesperson said. "Construction costs and other usage demands mean that we don't expect significant additions to supply growth in the luxury and upper upscale tiers." Mirroring the market in general, the company said most of its development growth is coming from the midprice without food and beverage tier.
As noted by JPMorgan Chase's Curtis, the lack of recent development in the upscale market has been perhaps most evident in New York, where new midprice hotels have been proliferating, yet no new full-service hotels are in development.
Given the strong 2004 performance of the Manhattan market and more positive projections for 2005, analysts expected developers to announce new full-service hotel projects, yet growth in the upper hotel tier has remained stagnant.
HVS International, in its 2005 Manhattan Hotel Market Overview, released last month said that despite a large number of hotels slated to enter the market through 2007, there would be a dearth of upscale properties. "Of the 2,668 rooms that are expected to enter in the market in 2005, 2006 and 2007, the majority are anticipated to be limited-service products," the report stated. The report noted eight hotels—all in the upscale or luxury segment—have closed in recent years for full or partial condominium conversions.
Smith Travel Research noted negative movement last year in room supply in the upscale tier in all domestic markets, yet by the end of the year PwC anticipates a slight bounce back in development. "While supply additions are expected to accelerate over the forecast horizon, they are not anticipated to reach the double-digit growth rates experienced in the 1990s," said PwC lodging analyst Bjorn Hanson of the upscale segment.
Hilton Hotels Corp. president Matt Hart last month told Business Travel News that although midprice hotels during the downturn by and large outperformed full-service properties, the return of the business traveler helped fuel the rebound of full-service and higher-tier hotels, mirroring other times of economic recovery
(BTN, June 20)."Companies have been keeping travelers on a tight leash and things are looking up and they have to release that a little bit. The only thing that will get us back to taking the high tiers out is another catastrophic incident, where the companies say they just can't afford it," said senior vice president of Partnership Travel Consulting Earl Foster. "Business travelers like the creature comfort. When you're on the road 60, 70 or 80 percent of your time—and a lot of business travelers are back to doing that again—staying in a budget property is not the same as staying at an upscale hotel. They want the bar. They want the restaurants that they can get the room service. They want the bigger room and the amenities that come with that," PTC's Foster said.
Kevin Maguire, travel manager at Austin, Texas-based Tokyo Electron America, for years has been a staunch proponent of trading down, leaning toward midprice hotels in lieu of their full-service counterparts. While lower-tier hotels continue to comprise the bulk of the company's hotel portfolio, use of upscale properties has been on the upswing this year. "It's a little bit of a higher mix right now," he said. "The reason is because the high-end properties are coming to us with prices that are the same or similar to limited-service properties."
Although Maguire has been able to secure rates comparable to lower-tier hotel segments, average daily rates in the upscale segment—following years of decline—began to rise once again. According to figures and projections PwC released last month, ADR rose 4.2 percent last year and this year analysts are anticipating rates to grow an additional 5.8 percent, tipping past the $100 threshold to $101.57. PwC projections point toward higher ADR in the segment through 2007, growing 4.6 percent in 2006 over 2005, and a further 4.3 percent in 2006.
Although the major multi-brand hotel companies as of press time were gearing up for second-quarter earnings announcements and would not discuss performance, analysts and forecasts project continued growth building upon strong first-quarter performance. If first-quarter numbers were any indication, the chains' financial strength may lie in upper-tier hotels.
For the first quarter, RevPAR at Marriott's Ritz-Carlton jumped 16.7 percent, as Starwood's St. Regis and upper upscale W Hotels saw quarterly RevPAR jump 11.6 percent and 13.9 percent, respectively. Quarterly RevPAR at Four Seasons Hotels and Resorts and Fairmont Hotels & Resorts increased 13.8 percent and 12 percent year over year, respectively
(BTN, May 16).