A couple of years ago, Jeremy Figoten had no problem finding first-choice hotel rooms for his association's 5,000-attendee annual meeting. Times have definitely changed. “In the past, hotels would try to work with us,” explains Figoten, director of meetings and expositions at the National Apartment Association, Alexandria, Va. “Now they say: ‘You want most of our meeting space but [only] about half or three quarters of our rooms? We'll pass because we can get a piece of business where we can get more of our rooms and give up less of our space.”
Welcome to the seller's market of 2006, where demand has increased while hotel room supply has flattened to where the gap between the two is the greatest in nearly 20 years. And with relatively little new hotel supply in the pipeline, the pendulum isn't expected to swing back anytime soon.
“When times get better, normally supply increases. In this particular market iteration, supply hasn't increased, in fact, it has shrunk,” says David Scypinski, senior vice president, industry relations at Starwood Hotels and Resorts, Washington, D.C. “So, the market is getting tighter and there's no end in sight.”
Anatomy of A Seller's Market
The recession recovery years of 2004 and 2005 saw a large disparity between the change in demand and the change in supply, creating an environment that is favorable to hotel operators, explains Robert Mandelbaum, director of research information services, PKF Hospitality Research, Atlanta.
For example, PKF data shows that in the top 25 markets, demand rose 6.2 percent in 2004 and another 4 percent in 2005, while supply grew just 0.6 percent in 2004 and 0.1 percent in 2005. (See chart, page 37, for more details.) The spread is the widest since at least 1988 (when PKF began collecting supply/demand data), and coming in back-to-back years makes the impact that much more dramatic.
“The first year out of a recession, hotel managers are hesitant to raise prices that early. It's usually not until they reach certain occupancy levels that they really then start to kick in and raise room rates,” Mandelbaum says. In 2005, occupancy reached 68 percent (up from 65 percent) and the average daily rate jumped 8.5 percent — the highest increase since 1988. ADR is expected to climb another 5 to 6 percent this year, and the average occupancy rate is projected to reach 69 percent.
While occupancy rates were at least this high from 1995 to 2000, what's really driving the market today is the lack of new supply. In 2006, about 75,000 new hotel rooms are expected to come on the market, an increase of about 1.7 percent over 2005. Beyond that, “there's not really any strong indicators of new supply,” Mandelbaum says. “We're projecting increases in occupancy and average rate for the next 2 to 3 years.”
So why hasn't supply followed as it usually does in recovery periods?
Several factors make this market different. One is the high cost of real estate and construction, particularly for high-end hotels. “It makes more economic sense to buy an existing hotel than it does to build a new one,” says Mandelbaum. Because developers are reluctant to make investments in large, high-end hotels, cities like San Antonio, Denver, and Houston, are financing their own because they are needed to support convention centers.
Also, condo conversions are having a negative impact on room supply, particularly in cities like New York, Chicago, and Miami. Hotel rooms are being taken off the market and converted to condos, because developers see a higher return on investment in condo units than hotel rooms. “When you're able to sell a condo right now for $600,000, $700,000, $1 million, it's more predictable money,” says Scypinski. These conversions are happening all across the country, “more than we even think it is.”
Hotel operators are being more careful about managing inventory in this seller's market. Traditionally, during high demand periods the market rushes to add new inventory and essentially oversupplies the market, say analysts. This time around, hotels are proceeding more cautiously as they seek to return to the profit levels enjoyed in the late 1990s.
The industry generated a record $92 billion in revenues in 2005, states Jan Freitag, analyst at Smith Travel Research, and in 2006, it could go over $100 billion in revenues. By 2007 or 2008, profit recovery is expected to return to pre-2001 levels. “The returns for the hotel industry are phenomenal right now because there is so little new supply,” he says. “There's too much money to be made out there.”
“It's very hard to tell a customer our hotel doesn't want your business because they've got six or seven other choices that are all better,” says Scypinski. “But unfortunately, in the last two years, your baby got ugly.”
In the largest markets, it's the small and midsizedthat are getting squeezed in favor of more lucrative mega-conventions and trade shows. The competition between hotels for these large events remains strong because of the economic impact they bring to cities, says Steven Hacker, president, International Association for Exhibition Management, Dallas. “Because of the competition, hoteliers have a greater stake in coming to the table in a meaningful way,” he says. Also, the large events book so far out, often 10 years or more, the cycle is taken out of the equation.
Planners are clearly feeling the pinch. “The demand in first-tier cities has definitely grown,” notes Beth Helberg, senior manager of meeting planning at the American Payroll Association, San Antonio. “This has affected the rates that are offered,” she adds, “and we have also seen the impact in the increase of rental fees and lack of availability of our preferred dates.”
Michelle Malloy, director of meetings at the National Association of Regulatory Utility Commissioners, Washington, D.C., was shocked by the high food and beverage minimums required by hotels in the cities that she sent proposals to for the association's 2010 conference. Hotels in San Antonio, Atlanta, and Orlando turned NARUC away because they refused to meet food and beverage minimums.
“I've never experienced that before,” says Malloy. The hotels wanted almost three times what NARUC usually spends on food and beverage. No decision has been made yet on 2010, but Malloy wouldn't be surprised if NARUC selects a second- or third-tier city.
In addition, hotels are tightening up onstipulations. Whereas room pickup requirements were in the 75 percent to 85 percent, range, now hotels are pushing the threshold to 85 percent to 90 percent, Malloy says.
Room blocks are also being squeezed, says Katherine Dutrow, meeting services manager at the American Academy of Ophthalmology, San Francisco. Hotels are offering fewer rooms for AAO's citywide than they have in the past. “I may have been able to book 85 percent of the hotel the last time we were in the city, now I can book maybe 70 percent,” Dutrow notes. “That is how they are looking at their group ceiling at this point because I think they are getting higher rates from other groups or transients.”
Lower ceilings means that groups have to use more hotels, perhaps farther away from the convention center. Not only is it more inconvenient for attendees, it could increase transportation costs. Also, states Dutrow, it's tougher to get room pickup if the hotels are too far away.
“There's definitely a ton more pressure to book more revenue,” Dutrow adds, whether it's through food and beverage minimums, which are being written into the, or annual room rate hikes that are twice the pace of inflation. “Some cities are looking for a six percent per year increase, and most of those we're not signing. If an attendee went to a city and three years later they return and see that rates went up 12 percent to 20 percent, they will notice.”
In recent months, hotels have refused to rebook some of AAO's smaller meetings because they were not generating enough revenue, Dutrow says. “That's really disappointing when you get a relationship with the hotel, then they won't rebook you.”
Scypinski points out that groups got great deals for meetings booked in the years after September 11, 2001. Now, he says, hoteliers have options: They can either take the business as it was contracted or replace it. In some cases, hotels are doing the latter: paying the cancellations fees and replacing it with a new, much more lucrative short-term booking. It's something Scypinski tries to avoid, but the reality is, it's happening. “It's not retributive; it's simply supply and demand.”
Seller's Market Survival Guide
With all signs pointing toward a seller's market that has legs, planners will have to approach the market differently when it comes to booking rooms. One solution is to book further out. For smaller meetings — those with between 75 and 300 peak night room nights — NAA's Figoten used to book them less than a year out, but now he is booking them 18 months in advance. “And if I can't get a Ritz-Carlton or a Fairmont, I'm going down to the next level.”
Planners are also looking at second-tier cities. APA's Helberg started looking at destinations she hadn't considered before. “In the case of our large annual conference, we have found that it is more affordable for both the association and our attendees to consider smaller cities such as Austin and Long Beach.”
Hartford, Conn., which opened a new convention center last year, is a small market city that is recently experiencing an uptick in bookings, says Michael Van Parys, vice president of sales, Greater Hartford CVB. “We are actually seeing the interest from meetings that are short-term, one to two years out,” he says — groups that are either priced out of New York and Boston or can't find availability on short notice.
Options are indeed limited in first-tier cities like Chicago, where 2006 is going to be a record-setting year for both citywide meetings and total room nights booked. However, says Marc Anderson, managing director of convention sales at the Chicago Convention and Tourism Bureau, if groups can be flexible on the dates, the time of year, and the days of the week, there is availability. In this market, CVBs have to “work a little bit smarter” than they have in the past.
For longer-term bookings, Anderson recommends that planners revisit their blocks a few years before the meeting and add more rooms to the block if necessary. After September 11, 2001, many groups greatly reduced their room blocks to curb attrition. However, with limited availability, that strategy is a double-edged sword. “Planners need to re-evaluate those blocks to protect themselves in the future,” he says. If attendance trends upward and more rooms are required, they might not be available when the meeting rolls around. If it turns out that the block is too large, most contracts allow for a reduction in the room block.
Hotels are likely to be more flexible in some areas than others. “For me, it's more important to get a buttoned upand a cancellation and attrition clause then it is to give certain concessions away (like comp rooms and other extras)”, says Scypinski. Revenue guarantees are also important for hotels, he says. These are some ways to increase the value of a piece of business, he adds.
The Bigger Picture
In such a competitive marketplace, the role of CVBs has never been more critical, notes Christine Shimasaki, executive vice president of sales and marketing at the San Diego CVB. “I think it's a huge opportunity for convention and visitors bureaus, because as availability and supply tightens, what planners are going to need is a source that enables them to do a comprehensive search for availability — and that's what CVBs are here for.” To help facilitate the process, San Diego offers a Web-based service called iLead, which enables hotels to bid on the leads the system generates for planners.
With strong demand (occupancy rates were over 72 percent) and little new supply coming into the market until 2008 when a new 1,100-room Hilton will open, availability is indeed tight in San Diego.
But the challenges of finding space also brings some benefits for planners, says Shimasaki. “On the surface it may not seem like a great thing for meeting planners, but it really is a good thing for the meeting industry because this only means that those hotels can reinvest their capital into products and services that their delegates will find of high value.”
Fred Shea, vice president of sales operations at Hyatt Hotels Corp., Chicago, concurs. “What hotels are doing now is investing millions and millions of dollars in the buildings. You really have to now because hotels are very concerned about becoming commodities. Every hotel company is establishing their guest rooms, their lobbies, their restaurants, and so forth to make sure we can differentiate ourselves from our competitors and from what people would consider commodities.”
And because hotel companies are investing in existing supply, the ability (and capital) to build new hotels is limited, Shea says.
That's just another reason why — for the foreseeable future — it's advantage: seller.
Condos and Centers Spur Growth
While the pipeline of new hotel construction is not exactly gushing, new projects are on the horizon in some cities, spurred by condo hotel financing and the demand from new convention centers.
“We have about 12 projects that are somewhere between a shovel in the ground and an announcement in the newspaper,” says Bill Peeper, president, Orlando/Orange County CVB. Four of the properties (Rosen, Peabody Hotel expansion, Hilton, and Westin) will add nearly 4,000 rooms near the convention center.
Of the dozen planned projects, the majority of them are condo hotels, which are owned (at least in part) by individual investors, who rent them back to the hotel management company. “There is the potential for huge inventory growth as a result of the new financing model of the condo hotel,” says Peeper. “With this new financing model, which is very lucrative and almost risk-free to the developer, they are able to build these properties with a belief that it's going to be a market with a continued increase in demand.”
As Chicago gears up for the opening of McCormick Place West in fall 2007, 3,000 new hotel rooms are planned to come on line by 2009. That compares with 5,000 rooms added in the previous 10 years.
To meet the demand created by the Boston Convention and Exposition Center, which opened in 2004, Boston is adding hundreds of new rooms. A 793-room Westin is opening adjacent to the BCEC this summer, while a 424-room Intercontinental opens this fall. In 2007, four more hotels are scheduled to open, bringing another 750 rooms to Boston. “We started the year with about 19,000 hotel rooms, and in two-plus years we'll be at about 21,500,” says Patrick Moscaritolo, president and CEO, Greater Boston CVB.
Mega-Shows: More Clout, Fewer Choices
As senior vice president of the conventions and meetings group at the National Association of Home Builders, Washington, D.C., Wayne Stetson plans one of the largest shows in the country, the International Builders' Show, attended by more than 100,000 people annually. At present, there are only three cities that can adequately handle his fast-growing meeting.
“As recently as four years ago, we were planning on going to Atlanta for 2007 and 2008,” says Stetson. But they had to cancel out of Atlanta because the room block would have been spread out too far. The association decided to “narrow it down to cities that can handle us in a reasonable proximity,” he says. That left them with only three possibilities: Orlando, Las Vegas, and Chicago. But since members want a warm weather destination, the choices are two — Orlando and Las Vegas.
Between now and 2021, the event will be held in those cities on a rotating business. Just recently, Stetson pushed out the booking schedule to 15 years (from 10) because of the popularity of Orlando and Las Vegas in January.
With the clout of bringing 100,000 people to a city, Stetson has some negotiating leverage, even in this market.NAHB keeps costs manageable by stipulating in each hotelthat rates cannot increase more than 3 percent annually. Also, NAHB does not sign attrition clauses.