Erosion of Luxury Hotels’ Room Rates in 2003 Suggests Further Deterioration in Profits for Manhattan

Luxury hotels in Manhattan experienced larger declines in room rates when compared to other segments during the first half of 2003.

May year-to-date data show that for luxury hotels in Manhattan average daily rate declined $28.50, or 13.6 percent, compared to the same period last year, while all other Manhattan hotels, excluding the luxury segment, experienced a decline of $9.98, or 6.6 percent. Contrasting this year’s performance with the first five months of 2000 when the luxury segment achieved an average daily rate level of $268.72, luxury hotel room rates declined to $181.67, or 47.9 percent, compared to the decline of $29.26, or 17.2 percent for all other segments. The city’s most expensive hotels have lost over $200 in average daily rate since 2000.

“To stay competitive in the market and attempt to control declining occupancy levels, the luxury segment was forced to lower room rates,” said Sean Hennessey, Director, PricewaterhouseCoopers Hospitality & Leisure Practice.

According to PricewaterhouseCoopers analysis, year-to-date data represent a reversal of what happened last year when room rates for the luxury segment held up better against other segments. Room rates for the luxury segment decreased 4.4 percent from 2001 to 2002, while hotels in the upscale and mid-price segments experienced decreases of 5.3 percent and 8.5 percent, respectively. Luxury hotels attempted to maintain room rate integrity by not cutting prices; however, competitive pressures undermined this stance in 2003.

Given luxury hotels’ room rate erosion so far in 2003, and the continued expense pressure that hotels are experiencing, PricewaterhouseCoopers anticipates another year of declining profitability.