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Article Excerpt
Increased business travel in 2005 further empowered the hotel industry after a 2004 shift toward a seller's market, allowing hotel companies to bask in higher average daily rates and occupancy levels, which led to pronounced gains in revenue per available room grad profits. The trend is continuing in 2006 as hotel companies chug toward historic profit levels, aided too by corporate travel buyers paying substantially higher rates due to growing demand and low supply.
The return of business travel helped drive a 5.3 percent rise in average daily rate in 2005 over 2004, according to PricewaterhouseCoopers, and PwC predicted that this rate would rise another 5.8 percent in 2006. With occupancy rates also rising, PwC calculated an 8.4 percent surge in 2005 RevPAR--startling considering that just three years ago RevPAR actually dipped 2.7 percent over the year before. Since then, the hotel industry has steadily rebounded: PwC forecasted that RevPAR too would rise almost 8 percent in 2006 and the outlook remains strong through 2008, barring any economic setback.
If 2006 first-quarter earnings are a harbinger of how things will shake out, then hotel companies are poised to reap tremendous profits in the foreseeable future. PwC's hospitality and leisure practice head Bjorn Hanson said that hotel companies would accrue upwards of $25.6 billion in profits this year alone, easily surpassing the prior record of $22.5 billion attained in 2000.
Contextually, the favorable climate enjoyed by hoteliers makes travel buying a more arduous task.
"The rate negotiating season that occurred in 2005 resulted in the largest range of results I can remember," said PwC's Hanson. "Some buyers were able to hold their increases to 2 or 3 percent, others saw rate increases between 12 percent and 15 percent. Overall, corporate rates increased by about 6 percent and hotel companies will look for the same this year."
Negotiations for the 2006 procurement season were based on travel buyers equipping themselves with usable data demonstrating use of preferred partners. "This year was based more than ever on having good data available for the negotiations," said Hanson. "The companies that could come in and say, 'We put X number of people in your hotels or into a specific city,' really made a difference. Both volume and quality of research was important."
Because compliance in a hotel program usually reaches only about 60 percent, it is even more important that buyers maintain strong relationships with their supplier counterparts. "Real good partnerships are going to share data," said Maria Chevalier, vice president of hotel relations at BCD Travel's Travel Procurement Solutions division. "Marriott, for instance, will come in with a very detailed analysis of your Marriott spend."
While all indicators point toward the further lining of hotel coffers, hoteliers are not resting on their laurels. A slew of new developments are in play and PwC forecasted that construction of 119,800 rooms would begin in the United States this year, a 45 percent increase over last year. However, wary hoteliers need not fear: Development growth will not make a significant dent in the market as customer demand is still outpacing supply.
Developers are clamoring for new projects due to skyrocketing ADRs and banks that are more inclined to finance them. According to Pat Ford, president of Portsmouth, N.H.-based Lodging Econometrics, a lodging real estate consulting and research group, the development pipeline stands at 3,377 hotel projects with 448,156 rooms, and similar to hotel profits, it's growing. "The construction pipeline for the industry bottomed in the fourth quarter of 2003 and there have been nine quarters since then," said Ford. "The first four quarters, it increased incrementally, then increased in an accelerated pace beginning in the first quarter of 2005." Lodging Econometrics expects that the pipeline count will hit its apex in either 2008 or 2009 and new hotel openings will top out in 2009 or 2010.
Within the pipeline, midprice without food and beverage projects are garnering the most attention by developers. Quite simply, midprice without F&B projects deliver the best return on investment. They are cheaper to build, lowering overhead costs, ,-md operators are able to charge higher rates at the new properties, as evidenced by the tier's 7.6 percent increase in ADR over 2004, which was tied with the luxury tier for the loftiest increase, according to PwC. It expects that number to rise in 2006.
The midprice without F&B tier has a pipeline of 1,328 projects for 113,935 rooms according to Lodging Econometrics, with InterContinental's Holiday Inn Express brand leading the pack with 342 projects, followed by Hilton's Hampton Inn with 284. Phil Cordell, Hampton Inn's senior vice president of brand management, said that if this pace continues he expects more new openings in 2007 than any year before.
Also in the midprice without F&B sector is Choice Hotels International, which franchises its Comfort Inn, Comfort Suites and Sleep Inn brands. In 2005, Choice executed 630 new domestic hotel franchise contracts, said David Pepper, Choice's senior vice president of franchise growth and performance, an increase of 16 percent over 2004. "One reason we're having such strong years is that franchisees and developers are seeing the Choice commitment to franchisee return on investment," said Pepper. "We are focused on strategically growing our existing brands, achieving growth in new market segments, improving our brands and property performance and improving brand recognition and business delivery." Choice augmented its extended stay catalogue when it acquired Suburban Extended Stay Hotels last September to accompany its MainStay Suites brand.
Even development in midprice with food and beverage is up. The sector is led by IHG's iconic Holiday Inn brand, which is being overhauled and imbued with a more modern feel. In January, ground broke on a Holiday Inn in Battle Creek, Mich., which IHG said would include this more contemporary, banovative design. IHG hopes that the new direction will be more attractive to both the developer community and business travelers. Currently, Holiday Inn has a pipeline of 121 projects, according to Lodging Econometrics--the most in the tier.
Best Western International, the world's largest single-branded chain with over 4,200 properties, also is busy ramping up expansion efforts. "There's a lot of money out there for development and we are trying to do at least 50 percent, if not more, new construction," said Mark Williams, Best Western's vice president of North American development. Most of Best Western's new development is taking place in secondary and tertiary markets, but Williams said that attracting deals in gateway cities is a priority too, as RevPAR in major cities continues upward. According to Smith Travel Research, the major U.S. cities enjoyed a 12.4 percent gain in 2005 RevPAR, the highest growth rate recorded since 1979.
While the midprice tier seemingly is the darling of developers and hoteliers alike, the deluxe sector also is looking to grow as the industry ripens. Larger, high-end properties tend to be built later in the real estate cycle, but are rewarding because they command the highest overall average daily rates. According to PricewaterhouseCoopers, the deluxe sector had one of the greatest dips in ADR during the industry downturn, however, it predicted that in 2006, deluxe properties world reap the sharpest rise in year-over-year ADR--an increase of 8.2 percent.
According to Lodging Econometrics, there were 50 deluxe projects in the pipeline as of the first quarter of 2006. Starwood's Luxury Collection had the most projects with 20, followed by Four Seasons' seven. Notably, of the 50 projects, 39 are of the mixed-use variety. A combination of transient rooms and private residences is becoming the norm in the luxury tier, enticing developers who can rely on the front-end money a mixed-use development can generate. "Mixed-use has been a staple of our development for years. In today's world, it's becoming increasingly difficult to not do mixed-use. It's here to...
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