Buyer's Market in Sight

Business conditions are tough for hotels, but the seller’s market is still strong in major markets.

Early in July, the hospitality industry was rocked by Marriott International's announcement that second-quarter profits fell by 24 percent and that revenue per available room (RevPar) would decrease by 1 percent in the United States in 2008. Two weeks later Starwood Hotels & Resorts Worldwide lowered its annual revenue projections and announced its second-quarter profits had fallen by 16 percent.

“Business conditions have deteriorated in the U.S.,” said Marriott International Chairman and Chief Executive J.W. Marriott, Jr., in a release announcing Marriott's second-quarter results. “While there is much economic uncertainty, we expect weak economic growth and soft U.S. lodging demand to persist into 2009.”

So, is the long-running hotel seller's market finally over?

It all depends, says Bjorn Hanson, clinical associate professor at New York University's Tisch Center for Hospitality, Tourism, and Sports Management, and former hospitality and leisure group principal for PricewaterhouseCoopers. “It's certainly much more of a buyer's market than we've seen since 2003 or 2004,” Hanson says. “But it's complicated. Markets like New York still have occupancy rates over 80 percent, which means close to 100 percent during midweek. So it's still a seller's market there.”

Jan Freitag, vice president for global development at Smith Travel Research, agrees that the buyer's/seller's market designation is location-specific. “The top 10 markets are still going to see a seller's market,” Freitag says. “These big cities haven't seen a real dent in demand.” Secondary markets, however, particularly those with a lot of new properties still coming online, will give buyers “easier negotiating opportunities.”

Second-quarter numbers were “slightly weaker than anticipated,” says Hanson, but observers need to remember that once autumn arrives, the hospitality industry begins to rely more on business travelers than leisure travelers. “And business travel has held up surprising well — better than expected,” he says.

While companies are trying to reduce travel, “much of the discretionary travel for business has already been eliminated,” Hanson says. “Business has already reacted to the cost of travel. What we do see happening is that companies are cutting back on small meetings, the kind that have 10 to 15 attendees. Instead they're using teleconferencing or videoconferencing, or using office space. For larger meetings, they're sending fewer attendees for fewer days — for example, 15 employees to a convention rather than 20, with just some of them attending each day.”

While the situation may be complex for planners looking to negotiate better deals, Freitag says there are opportunities out there for planners beyond room rates. “From a group perspective, I think there's an opportunity to negotiate up,” he says. “You may not want to focus on room rates, but what you're getting for those rates. Instead of having to pay for bottles of water or Internet service in addition to rooms, there should be opportunities to have those auxiliary services incorporated in the room rate.”