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The End of the Hotel Deals

February 5, 2011 Leave a comment Go to comments
Hotel owners and management companies are breathing a sigh of relief.

After weathering the worst of the economic downturn that sent their occupancies and room rates plummeting, hotels are starting to see more demand as business travel and, to a lesser extent, leisure travel, pick up. Occupancy rates climbed by close to 6 percent last year, according to the 2010 Hotel Horizons report published by Colliers PKF Hospitality Research. Average room rates, though, were generally flat.

Analysts consider occupancy a leading indicator — it climbs first, then rate increases follow. This year, they say, hotel rates will begin rising again. “We still have a long way to go, but we’re seeing early signs that because of strong demand recovery in 2010, managers are beginning to move room rates,” said R. Mark Woodward, president of Colliers PKF Hospitality Research. “We’re literally at the turning point.”

For travelers, that probably means the beginning of the end of the buyer’s market they have enjoyed over the last couple of years.

The return of the business traveler has been a big factor in driving up demand for hotel rooms. At the same time, according to Bruce MacMillan, president and chief executive of the trade group Meeting Professionals International, the number of meetings booked this year is expected to grow by 8 percent. Some events that had been canceled during the recession, he said, are now being rebooked.

Add to that equation lenders’ reluctance to extend financing to commercial real estate developers, in general, and hotel builders, in particular. “The pipeline has been shrinking fairly dramatically,” said David Loeb, managing director at the private equity firm Robert W. Baird & Company. He predicted that “relatively modest demand growth is still going to result in solid occupancy growth.”

To give more liquidity to the market, some hotel management companies have been stepping in and helping developers obtain financing, sometimes by providing what is called “key money,” funds akin to a developer’s down payment. “There are various ways of supporting the financing without becoming the lender directly,” said Frits D. van Paasschen, chief executive of Starwood Hotels and Resorts. “We do believe it’s important to help spur development of properties in markets where we think there are great opportunities.”

Ian R. Carter, president of global operations and development for Hilton Worldwide, said he expected that “as the credit markets free up and supply starts to catch up, we’ll start to see more balance come into the market.” But he pointed out that it would take a while, since it can take a year or two to build a hotel, even a limited-service property.

While the anticipated increase in room rates is good news for the lodging industry, it presents a challenge for travelers and travel and meeting managers.

“Hotels are asking for rate increases,” said Kevin Maguire, travel manager for intercollegiate athletics for the University of Texas at Austin. Mr. Maguire said he had noticed an increase in fees for items like a special pillow. “I’m starting to see some of that pop up on a much broader scale,” he said. In response, he is reducing the number of hotel brands he works with to increase his clout with the ones that remain.

Business travelers who pay their own way have had to get creative to keep getting the kind of deals they could easily find two years ago. Vivek Khanna, a Silicon Valley entrepreneur who travels about 100 days annually, said he was able to get rooms at full-service properties for $50 a night in the depths of the recession. But on a recent trip to New York City, Mr. Khanna said he couldn’t find a room at a low enough rate and stayed instead at a hotel in Newark for $45 a night.

One caveat to the good news for hotel companies is that the rebound in demand is unevenly distributed. “It’s pretty normal to see the demand increase on the coasts and work its way in,” said Tom Faust, vice president of sales for Omni Hotels. Cities like New York, Washington and San Francisco all finished 2010 with healthy occupancy rates. But analysts said many smaller cities and those located far from the coasts may continue to struggle.

“A lot of these second-tier cities have spent a lot of money building new convention centers or adding onto existing convention centers,” said Kevin Iwamoto, vice president of enterprise strategy at the online event management firm StarCite. “They have to fill that space.” For travel and meeting managers who have the flexibility of choosing where to hold events, this means it still may be possible to find bargains.

Leisure travelers, too, can still find deals if they are flexible, analysts say.

Luxury hotels may also still be offering recession-era rates, Mr. Carter of Hilton said. Rates at high-end hotels fell the most. And while prices are recovering quickly, the magnitude of their earlier fall means rates at those high-end properties have further to go before catching up.

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