— As director of public relations for Hotels.com, Taylor Cole averages three business trips a month, but is still occasionally surprised by her experiences on the road.
Staying at the Doubletree Guest Suites in Houston last week, for example, it wasn’t the room rate — $199 for a king suite — that caught her attention, but rather, what the rate included. “They had a [complimentary] manager’s reception with food, cocktails and music,” said Cole. “It was a nice way to relax after a day of business meetings and travel.”
It may also have been a sign of the times. As the economy recovers, hotel rates are following suit and business travelers are confronting the fact that it’s not necessarily the rate you pay, but what you get for it that matters.
Hotel rates on the rebound
Despite the lingering effects of the recession, the hotel business actually started coming back to life last year. According to a Hotels.com report released last week, the average cost of a hotel room rose 2 percent in 2010, the first time it’s risen, year over year, since 2007.
The uptick comes on the heels of the 13 percent plunge the industry posted in 2009. In fact, according to Victor Owens, the company’s vice president of marketing for North America, “Rates had fallen so far that we were seeing prices that travelers last saw in 2004.”
Few, however, expect the fire-sale prices to last. According to PKF Hospitality Research, U.S. lodging demand rose 8 percent last year, with another 4 percent bump expected in 2011. At the same time, the earlier flood of new properties that hit the market before the recession has all but dried up, with most analysts estimating any new supply at 1 percent or less this year.
Little wonder, then, that occupancy rates are also on the rise — up 6 percent last year, projected to rise another 4 to 5 percent this year — and that average daily rates are expected to follow suit.
“2011 is off to a good start,” said Owens. “[Transient] business travel came back first; the convention trade is coming back, and we’re seeing higher occupancies in the major business centers. The hotel industry is feeling a bit stronger about their ability to fill rooms at higher rates.”
A tale of two recoveries
But behind the predictions lies the larger reality of both the recovery and the hotel business. “The lodging business is such a street-corner game that averages are barely tethered to the reality of what’s happening on a market-by-market basis,” said Glenn Haussman, editor in chief of the industry website HotelInteractive.com. “There’s definitely a bifurcation between the high-end and secondary markets.”
Consider some numbers from the Hotels.com report. Last year, a sampling of first-tier business destinations shows average daily rates up 5 percent in New York (to $194), up 6 percent in Boston (to $155) and up 4 percent in Washington, D.C. (to $140). A similar sampling of second-tier destinations shows Seattle down 1 percent (to $123), Houston down 2 percent (to $107) and Tampa down 5 percent (to $100).
Meanwhile, and with more business travelers hitting the road, most analysts expect the first-tier cities (and the most-expensive hotels) to continue leading the rate-increase charge this year, with secondary cities posting similar, albeit smaller gains.
“Smaller markets didn’t have the big run up [before the recession] and had less of a decline, so the price increases will be more modest,” said Bob Brindley, vice president of business development at Advito, a division of BCD Travel. The company’s latest forecast predicts average daily rates will rise 5 to 6 percent in major markets, 3 to 4 percent in secondary markets and 2 to 3 percent in tertiary ones.
Finally, and regardless of market, the major hotel chains have one more ace in the hole when it comes to setting rates: the ongoing slowdown in new hotel construction in the wake of the recession. According to analysts at PricewaterhouseCoopers, hotel construction in the U.S. has dropped to its lowest level in two decades and is expected to increase by just 0.6 percent this year.
Instead, several major chains have been directing their efforts toward renovations and upgrades. Sheraton, for example, is nearing the end of a $6 billion revitalization program that’s seen 140 hotels renovated and another 79 opened (including conversions). “In a brand of just 400 hotels, we have 219 that are new or newly renovated,” said Hoyt Harper, Sheraton's global brand leader.
Others are almost certain to follow suit. “In 2011 and 2012, we’re going to see more renovations than have ever occurred in the hotel industry before,” said Haussman. “You have a new product, you can charge more.”
The bottom line on base rates
All of which points to a shift in the balance of power between hotels and their corporate counterparts. “The influence has switched back to the hotels again,” said Adam Weissenberg, vice chairman at Deloitte. “They’re saying, ‘Wait a minute; we’ve been making all the concessions for the last few years.’”
For corporate travel managers, that meant some challenging negotiations during this winter’s contract discussions. “Negotiations tended to go longer than in the past as hotels held out for higher rates,” said Brindley. “In some cases, they required four rounds instead of the usual two or three.”
In the end, he added, many contracts were signed at prices 5 to 15 percent higher than the year before, albeit with some concessions: “[Hotels] may have held out for double-digit rate increases, but to soften the blow, they’d include breakfast, high-speed Internet access, etc., to lower the net impact.”
Not surprisingly, the level of concessions tracks right along with the industry’s split-personality recovery. “Five-star properties are feeling less pressure to dive into deals,” said Owens of Hotels.com. “They’re not feeling as free in terms of giving away the perks and amenities that they had to in 2009 and early 2010.”
But, he added, three- and four-star hotels — particularly those that are still trying to drive occupancies higher — remain amenable to more give and take: “There are still deals out there; they’re just being more selective, offering midweek promotions, free parking, things of that sort.”
In other words, it’s not the base rate that matters, but the bottom line after you factor in the net impact of what is and isn’t included. For some business travelers, that will likely entail more intensive expense reporting and stricter compliance requirements; for others, a step down the star-rating hierarchy or, where feasible, a shift from first-tier to second-tier markets, where prices are generally lower and rate increases have been slower to materialize.
That’s the approach Sharon Schenk, president of Schenk & Associates, has taken as a meeting and events planner. “I tried to put meetings in Boston in 2011 and 2012 and they had no availability,” she said. “October 2012 and they couldn’t give me 150 room nights.”
Instead, she’s been exploring options in places like San Diego and Boca Raton, where, she said, hotels are still being flexible: “I don’t ask for the moon, but I ask for concessions that are important to my clients and I’m getting pretty much everything I ask for. If it means giving me five bucks off a gallon of coffee, they’re still going to make a lot of money on each gallon.”
For his part, Weissenberg recommends that other business travelers — solo road warriors or corporate travel managers — adopt a similarly flexible approach. “If you do your research and you can be flexible, you can still find some deals,” he said. “Not as many as a year ago, but you can still find them.”