This year's hotel request-for-proposals season, currently underway, will be like no other, thanks to the Covid-19 pandemic's effect on the industry and its resulting uncertainty. Still, the average 2021 U.S. corporate negotiated rate compared to 2020 will decrease 20 percent to 25 percent year over year, predicted industry expert Bjorn Hanson, adjunct professor at the New York University School of Professional Studies Jonathan M. Tisch Center of Hospitality, in his annual analysis.
Hanson in August and early September conducted his research, which includes discussions with industry executives, corporate travel executives, an analysis of industry financial data, press releases and information available on hotel and brand websites.
"For 2021, generally, buyers have somewhat of the advantage, although most buyers have dramatically less travel volume and more uncertainty and therefore, less with which to negotiate," according to Hanson's report. "Most sellers are facing the lowest occupancies in history, generally to be forecast to be 50 percent for the U.S. for 2021, and the largest decrease in average daily rates in history, at 20 percent to 35 percent. Making negotiations even more difficult is that buyer and seller staffing is reduced in many organizations with employment reductions and furloughs."
What Cards do Buyers Hold?
With lower volumes, what can buyers bring to the negotiating table? Hanson told BTN that even though corporate volumes will be down, so too will occupancy, so the volume share on behalf of corporate clients may be similar.
Another potential benefit for buyers is that "in a period of lower occupancies, corporate accounts create a base of occupancy," he said, which can help hotels' revenue-management strategies. When fewer numbers of available rooms remain, the higher their rate structure, and to the extent that a corporate account builds that occupancy base, it helps the hotel get other, higher rates. "[Corporate is] part of [the hotel's] solution in a difficult environment," Hanson said. "Not only does it provide occupancy, but the base will be helpful."
There's also the history that sellers have had the upper hand for at least a decade. In recent years, buyers accepted rate increases based on expected increases in ADRs, but those higher rates did not materialize, and they likely won't this year either. Therefore, "many buyers believe they have been overpaying, and this is the year to reset at lower room rates," according to the report.
Negotiating Approaches
Though his report lists four primary approaches for rate negotiations this year, Hanson believes the hybrid model—a negotiated rate of 10 percent to 20 percent lower than the 2020 rate or the best available rate, whichever is lower—makes the most sense, he told BTN. The challenge is that many hotels' property management systems are not really set up for this.
"What is the BAR that day? What is the corporate rate? What if the guest stays more than one night, what happens?" Hanson added. "Companies have become very serious about doing audits. How does that get audited? The smaller, independent hotels can do the [hybrid approach] better than the brands."
The approach that he believes will be applied the most, though, is using 2020 negotiated rates as a base, then applying a discount, such as 10 percent to 25 percent. The other two approaches are to maintain the 2020 negotiated rates with an understanding that there will be a negotiation at a future date, and dynamic pricing, in which a discount is applied to a defined rate, usually the BAR.
The report notes that some buyers and sellers have started to discuss longer contract periods, beyond the typical one-year term. Sellers see such a move as a way to negotiate higher rates now, and some buyers see it as a way to negotiate lower rates now. But Hanson on Friday said, "What I'm hearing more in the past couple days is, instead of doing an 18-month negotiation, buyers are looking for a six-month negotiation. Things are going to be clearer, and [buyers] are saying they'll agree to six months, because by mid-2021 [they] can talk again. Buyers should know how good or bad business travel with be then."
Challenges and Fees
One issue new to the negotiation process this year is the inclusion of a contractual commitment for health practices, according to the report, but "compliance to these standards has been inconsistent to date across the hotel industry." Hanson said that if it's an employer in a city using one hotel, it's not difficult to enforce. But "if it's a national brand and travelers are traveling across the country, the brand almost can't agree to that because it cannot be implemented with 100 percent certainty," he said.
The report also notes that urban and suburban resort fees mostly have been suspended, because the services used to justify those fees also have been suspended. The same applies to some amenities like fitness room access or breakfast, which are not necessarily being negotiated into rates this year. Some hotels, though, are proposing a daily health-related surcharge of $2 to $12 because of increased cleaning and the cost of personal protective equipment and operational practices, such as assigning every other room and leaving rooms unoccupied for one night between stays as health measures to reduce exposure to Covid-19.
"I started hearing about [this fee] starting in March, early on," Hanson said. "There seemed to be logic for it, more than for urban resort fees. But my anecdotal understanding is that buyers said they don't think it's legitimate. The charge was added hotel by hotel and not across brands, and it had to be approved by the brands. It was more at full-service hotels than select- or limited-service hotels."
In addition, the report notes that the share of corporate and contracted rates contributing to occupancy and revenue during the past several years has continued to shrink. For decades, corporate and contract rates contributed almost 20 percent of occupied U.S. room nights and nearly 30 percent of U.S. lodging industry revenue. Hanson estimated for 2019 that those figures are 15 percent and 25 percent, respectively. Part of that decline is because some companies are allowing travelers to book lodgings that are not part of a negotiated rate contract, such as apartment-style sharing accommodations, like Airbnb for Work.
Hanson anticipates that that such share will erode further over the long term, though it could increase in the short term. Adding to this, is what Hanson in the report called potentially less-stringent enforcement of corporate travel policies and auditing of employee expense reports due to Covid-19, given some business travelers' health concerns or reluctance to travel. This could spur more noncompliant travel choices, with companies more flexible and less inclined to impose consequences, Hanson said, adding that "people are furloughed, not working in the office, and it's harder to manage enforcement and compliance."
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