"We believe rates two years from now will be fully recovered."
Hotels are not discounting rates further. “This is the bottom. The economy is only going to get better,” said David Bagwell, executive vice president, Tishman Hotel Corp. Which is not to say that the hotel industry has recovered. “Compared to 2009, obviously things are better. It’s hard to fall off the floor,” said George Aguel, senior vice president, The Walt Disney Co. Aguel and Bagwell were among the hoteliers in a panel discussion at the Maritz Meetings, Events, & Incentives Forum, held in September at the Walt Disney World Swan and Dolphin Resort in Orlando.
Isaac Collazo, vice president, performance strategy and planning, at InterContinental Hotels Group, brought an economist’s perspective to the discussion. A strong uptick in group business in March and April this year, even as the economy continued to lag, was a surprise, he said. Over the past six months, he added, occupancy at “big box, upper upscale” properties has run 70 percent or higher. And in May, June, and July, IHG’s properties in major world cities such as London, Singapore, and New York were sellouts on Tuesdays and Wednesdays. Despite this strongly increasing demand, however, average daily rate “is not where we want it to be,” said Collazo. Indeed, while PKF Consulting sees occupancy and profits increasing in 2011, group rate increases will follow more slowly.
More Foreclosures to Come
With room rates so slow to recover, Tishman’s Bagwell, representing the perspective of hotel owners, predicted that hotel delinquencies and foreclosures will continue for two more years, while new hotel development will be stalled for the same period.
Bagwell put the current revenue per available room at about 1998 levels in many markets, noting that expenses are decidedly not at that level. “Hotel transactions in the 2000s were at peak prices,” he pointed out, using the analogy of buying an expensive house with an expensive mortgage and having a renter willing to pay the price. When the economy changes, then two things happen, he said: The renter negotiates a lower price, and the debt gets restructured. The monthly mortgage payment goes from $5,000 to $20,000.
“Similar to the hotel industry and room rates, it’s not sustainable,” he said. “You think you’re getting a great rate, but the hotel is suffering from both that lower rate and the higher mortgage. So you have to start worrying about service levels and a hotel’s potential foreclosure.”
Maritz Travel President and CEO Christine Duffy, who moderated the panel discussion, asked how companies could manage the risk of a foreclosure if they are booking two years out. “Consider when the hotel was built and if the hotel was sold in recent years. Look for a strong track record, consistency, and a strong management company,” said Bagwell. Be aware if it is starting to look tired or has announced that it has begun to deal with a “special servicer,” which happens before a foreclosure. He also pointed out, however, that just because a hotel is operating under a special servicer doesn’t necessarily mean it will be foreclosed upon. It may be because the property is renegotiating its debt. “Regarding hotel, you can also ask for a clause that says if the hotel is in foreclosure, the company has the right to cancel,” he advised.
Shifting the Short-Term Mindset
One thing that has taken hold of both the group and leisure market during the downturn, the panel said, is a short-term mindset—“waiting to see if they can get a deal,” as one of the hoteliers put it. Their clear message, however, was that demand is solid going forward, and if you wait too long for the deal, you may find you’ve already missed it.
Duffy also asked the panel about the ongoing challenge of online travel agencies: Meeting professionals are frustrated when they negotiate a group rate and then attendees find a significantly lower rate online. “Some of that will be rectified as we go through the recovery,” Collazo said. “It’s not good for us, either. But booking pace reports are showing the right trends. There will be less dumping [of rooms] to the online travel agencies because we can see the demand.”
All agreed that waiting for discounted rooms isn’t a wise strategy. “As a group, you want guarantees,” Disney’s Aguel said. “Uncertainty [of where the market is going] is the price you pay to lock in the rate.” (The situation, he added, did not get created with the online travel agencies, recalling the days when it would be a full-page ad in The New York Times showing discounted rates that a meeting planner would bring in to his or her salesperson.)
David Bagwell was blunt: “We believe rates two years from now will be fully recovered. Now is the time to buy.”
Going Forward Together
Paul Scott, general manager at the Walt Disney World Swan and Dolphin, host of the Maritz event, said that planners and suppliers are working through the downturn and uneven recovery together. “I’ve been in this business many years and seen downturns before,” he said. “This is unusual. Markets are moving sporadically. I don’t remember a disparity this great. You have to be upfront and aligned with your clients. Negotiations have been very difficult.” His advice: “Be reasonable. Be good partners. Stay in touch.”
Aguel said meetings and events are about more than budgets. “Is rate the best way to know who will give you the best experience?” he asked. “You need a brand that will help you meet your objectives. Most properties have great ballrooms. It’s the people who make the difference. Will they look at your program as more than just a piece of business?”
Collazo summed up the overall situation: Signs are positive, but uncertainty reigns. “People are out of work and productivity is up,” he said. “Business will have to hire people. It just takes time. We’re all in this together. This is the worst recession we’ve seen in our lifetime but we will get out of it.”