If anyone has a good vantage point for lodging performance, it's Bjorn Hanson, PhD,industry leader, PricewaterhouseCoopers Hospitality & Leisure Practice, New York. Meetings have never been more important to many major markets, he says, but the supply of full-service hotels has not kept up with demand. We talked with him about these trends and others affecting hotels in 2003 and beyond.
CMI: What are you projecting for average hotel occupancy and rate in 2003? What about?
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 a 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. So coming up 3.5 percent isn't 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 hotels fare better than budget hotels? What about convention hotels?
A: High-end properties will recover more quickly, but they've suffered more. Upper 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. The surprise 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 RevPAR is meetings and conventions. It's not true in all markets, but in many of the major markets, this sector has become more 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 same hit on rates. Group and meetings used to rank third in importance; I don't know that you can say it's first yet, but it's definitely not third.
Q: What does that mean for meeting planners?
A: 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. By waiting, planners only gain more negotiating strength.
Q: How can meeting planners take advantage of that strength?
A: I'm seeing meeting planners try to get other concessions from the hotel instead of trying to knock the last $2 or $4 off the room rate. Maybe they don't pay for meeting rooms, or they get a certain percentage of rooms comped. Those meeting rooms are sitting unoccupied, so waiving a $1,200 or even a $4,000 meeting room charge doesn't cost a hotel anything. But to the meeting planner, that is much more valuable than a couple of dollars on the rooms.
I'd also suggest that meeting planners be a bit more flexible. In some urban areas where spring and fall are peak demand periods, there's more negotiating strength than ever for nonpeak seasons.
Q: How will these predictions change if the United States goes to war with Iraq?
A: These predictions assume we don't. If we do, there might be another 10 point RevPAR decline on top of what we have in our forecast. But it depends. Will it be a 30- to 60-day event, or will it be a six-month event? 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 who moved meetings back to domestic destinations were able to take advantage of overbuilt capacity.
A: Construction of new rooms peaked in 1998 and has been slowing since. 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 '98 was a surge in full-service, mostly upper-upscale construction. There were record levels of room starts through the late 1990s, but mostly in smaller, limited-service hotels. There was 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. 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 that this year 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 billion 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 more than 16 percent.
For meeting planners, it's important to understand that even though 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. Make sure thesays that the rates agreed to are subject to completion of any scheduled upgrades.
Because of the financial distress of some hotels, 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 a notice to redirect your people.