Q What are you projecting for average hotel occupancy and rate in 2003?
A In August we forecast 59.8 percent for year-end average occupancy in 2002. Our current forecast is 59.5 percent for this year, and 60.1 percent for 2003. It is statistically significant movement, but very small.
Maybe more important is revenue per available room , which decreased by 7 percent in 2001. Our forecast is for it to decline a further 2.3 percent this year, followed by an increase in 2003 of 3.5 percent. That sounds good for hotels, but it really isn't, because if you add the two prior years together you get a total two-year decline of 9.3 percent. That's not even halfway to a recovery, forget about growth.
The best you can say from the hotels' perspective is that rates aren't going down anymore.
Q Will high-end or convention hotels fare better than budget hotels?
A High-end properties will recover more quickly, but they've suffered more. Upscale hotels had a RevPAR decline in 2001 of 11.6 percent. Our forecast for 2002 is a further 2.7 percent decline for this segment, or 14.3 percent compared to 9.3 percent for the industry as a whole.
As for convention versus leisure hotels, I don't have data but I'm not without opinions. The surprise here has been that of the three demand sectors — leisure, business travel, and group and meetings — the sector that's held up best in terms of its RevPAR is meetings and conventions. It's not true in all markets, but in many of the major markets, this segment has become increasingly important.
There's still the decrease in occupied room nights [for this segment], so it's not performing on the occupancy side as well as leisure is, but it hasn't taken the hit on rates that the other two segments have. Group and meetings used to rank third in importance. I don't know that you can say it's first now, but it's definitely not third.
In many cities, there are nights, and sometimes whole weeks, when the highest achieved rate, or average paid rate, is the group rate. So this is a very important market segment.
Q What does that mean for planners?
A The good news is that most of the major markets have enough of an effect from the leisure and the commercial decline, even with some group declines, that there is greater availability of rooms. A lot of meeting planners are waiting to book until closer to their meeting date, assuming things are not going to turn around and get really great for hotels in the near future.
Q What are some other tips?
A Try to get other concessions from the hotel instead of trying to knock the last $2 or $4 off the room rate. Maybe you don't pay for meeting rooms, or you get a certain percentage of rooms that are comped, or the hotel pays for the bus transportation of attendees to the convention center. For the hotel, those meeting rooms are sitting unoccupied, so waiving a $1,200 or even a $4,000 meeting room charge doesn't cost them anything. But for the meeting planner, not paying for meeting rooms is much more valuable than a couple of dollars off the room rate.
I'd also suggest that if planners can be a bit more flexible, they can get great deals. For instance, in some urban areas where spring and fall are peak demand periods for meetings, there's more negotiating strength than ever before for nonpeak seasons. There are tremendous regional variations, however. San Francisco is having a much more difficult time, with rate and occupancy, in attracting meetings, for example, while New York is doing quite well in attracting meetings but it's having to discount to attract the business.
Q How will these predictions change if war with Iraq erupts?
A These predictions all assume that we do not go to war. I'm not a political analyst, but I think all this talk about invading Iraq was more to get the UN to respond. If we were planning to go to war, that would not have been the best way to proceed.
I'm probably wrong, but I think the right thing to do is forecast as if we won't be going to war. If there is a war, there might be another 10 point RevPAR decline on top of what we have in our forecast. But it really depends. Will it be a 30- to 60-day event, or will it be a six-month event, and continue? And then it also depends on what kind of reaction we see from the rest of the world, politically, and any retribution that occurs.
Q During the Gulf War, planners could take advantage of overbuilt capacity in the States. Will they be able to do so in 2003?
A No. Construction of new rooms peaked in 1998, and has been slowing since then. We had almost three years of slowing construction before last fall. So you don't have the relative level of new supply coming on to compete with existing supply that we had at the time of the Gulf War.
The reason room starts peaked in 1998 was a surge in full-service, mostly upper-upscale construction. There were record levels of room starts through the late '90s, but mostly in smaller, limited-service hotels. There had been just a narrow window for full-service hotel construction before the economy started to slow. In the long term, this is bad news, because demand will continue to grow for full-service hotels, which are an under-represented share of supply. I've been saying that since about 1989, and I don't think that will change for the rest of my career. I think this is a long-term issue for meeting planners.
Q Are hotels continuing to make a profit?
A Industry profits are surprisingly strong. Our 2002 forecast is for profits of $16.7 billion, and that's at 59.5 percent occupancy. In 1990, occupancy was at approximately 60 percent, and the industry lost $5.7 billion. So the good news is we're at an occupancy rate that caused widespread financial depression a decade ago — but this year it will still lead to profitability. Now, that level of profitability sets us back five years, but five years ago the industry was quite pleased with $16 or $17 billion in profit.
Another strong sign is that the level of financial delinquencies — hotels not being current on a debt service payment — peaked earlier this year at about 5.5 percent. That's high, but back in 1990, it was over 16 percent.
For meeting planners, it's important to understand that although only 5.5 percent of hotels were in default position earlier this year, some hotels are struggling financially and there are reductions in service and in investment in repairs and maintenance.
On hotel inspections, look a little more closely for threadbare carpets and things like that. If a meeting is being planned two or three years out, make sure thesays that the rates agreed to are subject to the completion of any scheduled upgrades.
Because of the financial distress that some hotels are in, we're seeing brand changes. That can lead to unforeseen expense, because you'll send out the early notice to attendees saying the meeting is at the Sheraton, but when the time comes, that hotel isn't a Sheraton anymore and you have to send out another notice to redirect your people to the newly branded hotel.
Q What other factors are putting pressure on hotel owners and management companies?
A The agency litigation that's currently being brought against some management companies is going to have a profound impact, but I don't think we know exactly what that impact will be.
There was a court case about 10 years ago [Robert E. Woolley v. Embassy Suites, 1991] that applied a theory of law called “agency law” to the relationship between hotel management and owners. Prior to that, hotel managementhad always been viewed as service contracts. But in the 1991 lawsuit, the courts ruled that those management contracts, which were very typical contracts, established an agency relationship instead.
An agency relationship is much more restrictive than a service contract. For example, an agent cannot compete, or cause competition, with its principal, or owner. Say you have two hotels in a city managed by the same company, but with different owners. One night a guest leaves one of those hotels for the other property. If that managing agent gets a reservation fee or some other financial benefit, then the agent is competing with its principal. What was standard practice is now not allowed.
This is on the minds of all management companies, and five years from now, management contracts, and relationships between managers and owners, are going to be very different.
Q Will the issues from these lawsuits affect room rates?
A The management companies won't be able to use information from one hotel to another, because under agency rules, the information belongs to the owner, not the management company. So it will change things about how the relationship is managed with meeting planners and corporate travel planners. I don't know that you'll notice it, but it will be out there.