A recent survey of the financial performance of U.S. hotels by the Hospitality Research Group
(HRG) of PKF Consulting found full-service hotels reacted with more volatility to recent economic downturns than their limited-service counterparts.

According to HRG’s Robert Mandelbaum, full-service hotels suffered more over the last two years of the current recession than did limited-service properties.

“The decline in occupancy and average daily room rate was greater for full-service hotels,” he said. “However, we expect the full-service properties to bounce back more quickly.”

Mandelbaum sees full-service performance in terms of a “V” shape, with a sharp decline and equally sharp recovery, while limited-service hotels follow a path more like a wide and lazy “U.”

“We don’t see limited-service hotels bouncing back as quickly. Maybe their recovery, in terms of RevPAR, won’t occur until 2005 or 2006, whereas full-service hotels most likely will be back by 2005 or so. With the recovery, as typical of other recoveries, we expect occupancy to bounce back first, with average room rates later. We don’t see any significant rate growth above the pace of inflation until about 2005,” he says.

HRG recently surveyed 1,300 U. S. hotels to determine financial performance over time. Using the record profitability of That Wonderful Year 2000 as a starting point, HRG found occupancy for full-service hotels to be 70.5% for that year, dropping to 63.8% in 2001, then to 63.2% in 2002. HRG anticipates a slight advance to 64.1% at the end of 2003, followed by a leap to 67.6% in 2004.

For the same years, ADR started in 2000 at $121.53, declining to $118.53 in 2001 and $113.75 in 2002. HRG projects an ADR of $111.46 for 2003 and $115.55 for 2004.

Although many industry analysts feel leisure travel will remain robust, Mandelbaum says the recovery will be driven by a return of group and business travelers.

“These are the two segments that experienced more of a decline, so when recovery occurs, it will be when these two segments start to bounce back,” Mandelbaum says.

Years of discounting by anxious hoteliers will continue to take their toll, especially with the full-service hotels, and Mandelbaum sees this as an ongoing challenge.

“We don’t project significant rate increases until 2005. Part of that is just the natural tendency of hotel managers who want to see a firm recovery in terms of occupancy, something that tells them that travel is back. As occupancies start to improve, then they’ll get a little more aggressive in their rates. Plus, simultaneous with this recession, not only did you have discounting because hotel managers are trying to get anyone in the door, but there’s the whole Internet revolution, which has sort of empowered people. I think a lot of travelers now are in the habit of searching for the lowest possible rate by calling 800 numbers, using different websites, calling the hotel directly. They’ve gotten trained that way,” he says.

HRG sees the market in 2003 and 2004 to be so soft that hotels will not push room rates until 2005.

“We started to see a bit of an uptick in the fourth quarter of 2002, but that got wiped out when the Iraq war started in 2003,” Mandelbaum says.

Once the recovery gets into full swing, hoteliers will return to freer-spending ways. Those who were laid off will be hired back, deferred maintenance will move to the front burner, and upscale chocolates will be on the pillows at turn-down time.

“They’ll reopen the restaurant they closed and put back some of those special amenities that helped justify the value proposition that allows the 10% to 15% rate premium that a luxury hotel charges over an upscale hotel and an upscale over a midmarket,” Mandelbaum says.

What’s in store for development?

If full-service hotels come out of the recession first, does that mean they will be the first type for developers to build? That’s doubtful, says Mandelbaum.

“What tends to get built is what can afford to be built, not necessarily what’s demanded,” he says.

“What we’ll probably see is more limited-service and/or midscale with food and beverage being planned and built over the next few years, followed by the larger convention, full-service, and luxury hotels.”

The industry has seen a lot of full-service hotels coming online, thanks to the legacy of the “great performance” of that segment in the late 1990s, he says.

In the current environment, more development is going to occur in midscale and economy, “because that’s what developers can afford to do.”

Where full-service properties like convention and luxury hotels are being built, the effort is often a public/private venture. “With public assistance, private developers can build high-end luxury hotels or big convention hotels. But without public assistance, it’s a challenge these days,” he explains.

The above article is excerpted from a longer piece appearing in the Nov. 21-Dec. 6 issue of Hotel Business.
——-