Sluggish Economy Allows More Rooms For Negotiation

<B>Sluggish Economy Allows More Rooms For Negotiation</B>

By Robert Selwitz

Sluggishness in the national economy is impacting New York City's hotels. While no mega-shifts are visible, there now are opportunities for business travelers to acquire rooms more easily--and pay less for them than during recent years.

Several veteran analysts of the city's lodging scene, as they described subtle, but real, market changes of interest to travelers seeking maximum return for their travel dollars spent, said this year's business shows stark differences from record-setting 2000.

"The city is definitely struggling," said Sean Hennessey, director of hospitality practices at PricewaterhouseCoopers. "A year ago, you might have had to call 40 hotels just to find one that, on short notice, would take you in. And, if you were lucky, that hotel would set the price. Now, that situation has turned more favorably toward hotel room purchasers.

"Now that individual business and leisure travel have slipped, hotels are much more welcoming toward group traffic," continued Hennessey. "Clearly, hotels get less per-room revenue from rooms sold to members of groups instead of individuals. And, until recently, they've been able to hold on to rooms in anticipation of selling them to individuals at higher prices. Now, however, those 'last minute' sales aren't happening so frequently. Properties, therefore, are having to sell more excess capacity via Priceline.com, or other late-sale discount Internet channels."

Nevertheless, Hennessey doesn't see anything resembling major price drops. "The rate decline here is due primarily to sales to more price-sensitive customers," he said. "Hotels are very reluctant to officially lower rates because once reduced, they are hard to bring back." But, he stressed, it does mean that group bookers now have greater opportunity to enjoy easier access or reductions via block purchases. "That also means individual business travelers making their own arrangements might be surprisingly successful by checking directly with hotels to determine the availability of lower-priced options for that evening.

Hennessey said this year might end up resembling 1998 when, after a slow start, summer traffic seriously revved up, creating a momentum that produced solid business for the rest of the year. For now, though, "Companies are questioning whether a non-revenue trip is truly necessary," he said. "After all, companies don't want to be in the position of urging economic cutbacks while, at the same time, sending off incentive winners to high-priced resorts."

Robert LaFleur, associate director at Bear Stearns Inc., reported that New York City's occupancy for March 2001 was 77.3 percent, a significant drop from the 84.2 percent registered last year. There are particular fall-offs where technology and financial services are critical job elements and sources of business travel, he said. Therefore, while demand in New York decreased 3.4 percent this March compared with last year, San Francisco experienced a 14.4 percent drop this year during the same timeframe. Revenue per available room also declined this March, decreasing 8.3 percent in New York and 12.8 percent in San Francisco, compared with 2000.

"While we are in the midst of a pullback," said Daniel Lesser, senior director of hospitality industry group at Cushman & Wakefield Inc., "It's one that has hardly squelched demand for Manhattan beds. Through it all, New York continues to be a hot spot. This city drives on many cylinders, including those generating weekday business as well as weekend leisure traffic."

Lesser stressed that while last year's 84.5 percent occupancy rate was hardly threatened, "even with a doomsday scenario where you saw a 10 percent decline, you'd still be dealing with occupancies in the mid-70s. Considering that the break-even occupancy level is in the high 50 percentile, you'd still have to go a very long way before anyone started worrying about losing money."

Lesser does expect a reduction in the velocity of price rises, but said little is on the horizon to indicate that New York's base of some 70,000 quality rooms will not continue to be in strong demand. "Actually," he said, "demand has never been a problem. Usually, it's all about supply. While there are new hotels arriving, there are not many viable sites for new hotels to be built. Also, financing for new hotels remains difficult, and permitting and processing are always a challenge. All in all, stable growth levels and steady demand create a situation where the likelihood of major changes in the New York hotel market appears quite slim."

John Fox, senior vice president of PKF Consulting, agreed: "The sky is not falling. Despite all that we've seen, even if rates drop, we will still be at very healthy levels." Asked about any downward changes in hotel buys, Fox said that "those at the very highest levels traditionally have been insulated from economic pressures to downgrade. Changes might appear more evident within the moderate-priced $125 to $225 range.

"While we are witnessing notable statistical declines in this year's hotel occupancies," Fox added, "this is happening against the extraordinary base of record-setting 2000. For example, last April, New York occupancy reached 90 percent. It's almost inevitable that April 2001 could not match that.