“When times get better, normally supply increases. In the hotel market, supply hasn't increased, it has shrunk,” says David Scypinski, senior vice president, industry relations, Starwood Hotels and Resorts, Washington, D.C.

Demand, on the other hand, has skyrocketed in the past two years, creating the largest gap between the change in demand and the change in supply in decades.

In the top 25 markets, room 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, according to PKF Hospitality Research, Atlanta. Occupancy rates followed suit, rising to 68 percent in 2005 (up from 65 percent), while average daily rate jumped 8.5 percent — a 27-year high. This year, ADR is expected to climb another 5 percent to 6 percent, and occupancy to reach 69 percent. This combination of higher rates and less availability is putting a huge squeeze on meeting executives.

Supply Pipeline Is Trickling

What is driving the hotel market is not so much demand as 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, the pipeline is far from overflowing with new projects. “There aren't really any strong indicators of new supply,” says Robert Mandelbaum, director of research information services, PKF.

Why hasn't supply kept up? Several factors make this market different from that of 10 years ago. 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 such as San Antonio and Denver are financing their own because they are needed to support convention centers.

Also, condo conversions are having a negative effect on room supply, particularly in cities such as 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.

And, in general, hotel operators are being more careful about managing inventory. Traditionally, during high-demand periods, the market rushes to add new inventory and essentially oversupplies the market.

This time around, says Mandelbaum, hotels are proceeding more cautiously as they seek to return to the profit levels enjoyed in the late 1990s. (Profit recovery is expected to return to pre-2001 levels in 2007 or 2008, experts say.)

Meanwhile, revenue recovery has already occurred, as the industry generated a record $92 billion in 2005, states Jan Freitag, analyst at Smith Travel Research. In 2006, it could exceed $100 billion in revenues.

“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.”

No Room at the Inn

Business planners, in particular, are feeling the squeeze because they book so many short-term meetings. It's not simply a question of whether a hotel in a given city has available rooms; it's also a question of how the hotel wants to sort the rooms out. “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.

One solution is to book further out or to book meetings for multiple years at a property, says Marc Anderson, managing director of convention sales at the Chicago Convention and Tourism Bureau. Also, if groups can be flexible on the dates, the time of year, and the days of the week, there still is availability, he says.

More planners are also looking at second- and third-tier cities. Hartford, Conn., which opened a new convention center last year, recently experienced an uptick in bookings, says Michael Van Parys, vice president of sales, Greater Hartford Convention & Visitors Bureau.

The interest is coming in part from groups that are either priced out of New York and Boston or can't find availability on short notice.

No Room at the Inn

How supply has shrunk and demand has jumped over the past five years in the top 25 U.S. markets

Supply Change Demand Change
2001 2.9 percent -5.6 percent
2002 2 percent -0.3 percent
2003 1.2 percent 1.6 percent
2004 0.6 percent 6.2 percent
2005 0.1 percent 4 percent
Sources: Smith Travel Research, Torto Wheaton Research, PKF Hospitality Research