Meeting Mentor Magazine

December 2018

Cover Story

Seller’s Market, Disruptors
Complicate 2017 Hotel Negotiations

Hotel industry forecasts for 2017 all point to a continuing seller’s market. Not only are higher rates and occupancy likely to complicate future contract negotiations this year, expect some turbulence from disruptors like Airbnb and dynamic hotel pricing.

The projections:
STR and Tourism Economics predict “healthy” growth in 2017, with average daily rate (ADR) up 4.3% (almost matching 2016’s projected 4.4%), and occupancy at an “all-time high,” said Jan Freitag, STR’s senior vice president for lodging insights. Demand growth of 2.1% in 2017 is projected to surpass 1.9% supply growth.
• U.S. hotel occupancy will continue at record levels through 2017, according to PKF Hospitality Research/CBRE Hotels. The Upper Upscale segment — which brims with meeting properties — will record 73.9% occupancy (vs. long-run average occupancy of 69.8%), and ADR growth of 4.6%.
• The GBTA Foundation predicts U.S. business travel spending will grow 3.2% in 2016 and 3.5% in 2017, reaching $299.9 billion and $310.4 billion, respectively. the price growth will not include airfares, it reports, but higher ancillary fees are likely to increase the total cost of air travel. Increases projected for 2017: Lodging 3.2%, food-and-beverage 2.3%, airfare 3.5%, ground 3.5%, rental car 3.5%, other 2.8%. (Data sources for GBTA include D.K. Shifflet & Associates, Moody’s and the U.S. Bureau of Labor Statistics.)
Meeting Professionals International’s Meetings Outlook Winter 2016 projects price changes over 2016 that outstrip expected cost-of-living increases: F&B/catering +4.6%, audiovisual +3.6%, air travel +4.2%, room rates +4.5%, and meeting space +3.3%.

The pipeline outlook:
• STR is tracking 142,000 rooms currently under construction. About 70% of that pipeline is in Upscale and Upper Midscale hotel segments, but only 10% in Luxury and Upper Upscale segments — where many meetings take place. “For meeting planners, availability may be even harder to come by, with continued increases in room demand,” said Freitag.
• Just under 50% of new hotel construction is taking place in the 26 markets with highest existing supply numbers. Still, some of the larger U.S. markets will be “soft” relative to the U.S. as a whole, said R. Mark Woodworth, CBRE Hotels/Americas Research senior managing director, including Houston, Charlotte, New York, Austin, Pittsburgh, Miami, Dallas and San Antonio. Freitag commented on three cities in particular: the steep drop in demand in Houston due to the hard-hit oil market, continuing strong demand in Nashville, and San Francisco “which has not seen a lot of new supply, occupancy is high, and the convention center is undergoing renovations.”

The impact of disruptors:
Airbnb continues to be a growing presence in key U.S. markets. A survey of 2,000 U.S. consumers by Goldman Sachs Group Inc. found that if people have used a peer-to-peer accommodation, the likelihood that they prefer traditional hotels is halved. And the numbers familiar with or using sites like Airbnb and HomeAway are increasing significantly. Yet, according to a study by CBRE Hotels’ Americas Research, more than 55% of $2.4 billion in Airbnb spend is generated in just five cities — New York, Los Angeles, San Francisco, Miami and Boston. These cities were also among STR’s top eight with the highest occupancy and average daily rate in 2015. It should come as no surprise that these markets would generate the majority of spend on Airbnb.

The presence of Airbnb and other participants in the sharing economy lodging space varies considerably from city-to-city, noted Woodworth. In the big markets mentioned above, where these alternatives are readily available, “it seems reasonable that some meeting attendees would opt to stay ‘outside of the block’ in a non-traditional hotel,” he said. Yet with “little empirical evidence at this point, our anecdotal view is that this should not be a concern in the vast majority of U.S. markets.”

Interestingly, the CBRE study finds that Airbnb is not always the lowest-priced option for temporary accommodation: the average rate for an Airbnb unit was $148.42, 25% higher than the average hotel rate of $119.91 reported by STR. Averages, however, can’t tell the true story market-by-market. STR’s own report on Airbnb data (using the Manhattan market) found that the majority of guest nights are for stays of 7-plus days, “similar to the pattern at extended-stay hotels,” less like stays at meeting properties. Nor is there evidence that every room occupied by an Airbnb guest is a room taken from a hotel.

As for dynamic hotel pricing, “hotels are basically saying, ‘We don’t know what rates will be at that time. So we’ll give you our best available, minus a bit,’” said Freitag. He also cited the example of Starwood giving special rates to loyalty customers only through the SPG app. “All of this still has to be figured out,” he acknowledged. What is certain is that “it’s going to be very hard for a meeting planner to go back to a rate of $100.” — Maxine Golding

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