Most hotels likely to see occupancy rates fall next year

Business travelers may notice quieter hotels next year.

Hotel forecasters have been busy revising their expectations in light of all the economic turmoil and an anticipated drop in business travel. One forecast suggests that U.S. hotels will fill the smallest percentage of rooms since the figure has been tracked.

In its 2009 forecast — completed in September, but revised after the stock market collapsed in October — PKF Consulting of Atlanta expects hotels to fill an average of just 58.3% of rooms, or a 4.4% drop in the occupancy expected this year. If true, that would be the worst occupancy rate at U.S. hotels since 1988, when Smith Travel Research started tracking the data.

The current lowest occupancy rate, according to Smith Travel, was 59% in 2002 — the first full year after 9/11, the start of the Iraq war and the SARS epidemic. Separately, Smith Travel's revised forecast is for occupancy to drop 3.5% in 2009, to 59.1%.

"Toward the end of September, it was as if somebody, somewhere, hit the pause button," says Mark Woodworth, president of PKF Consulting. "People said, 'I'm going to stop what I'm doing and adjust my strategies going forward.' "

October has been even more discouraging. Marriott International CEO Bill Marriott wrote in his Nov. 3 blog that "in just the last few weeks, our business outlook has further weakened."

Part of the problem is that declining demand for hotel rooms will coincide with a boost in new rooms — a double whammy for hotel owners and operators.

Lenders started to fuel hotel development starting in late 2005, and many new properties have been opening this fall — just as the market started to slow, Woodworth says. What does the climate mean for business travelers besides a calmer lobby?

•Better hotel rates. Once hotel managers see occupancy levels dip into the 50% range, they can be expected to cut rates to maintain occupancy levels and better cover fixed costs, Woodworth says. But even if prices stay flat, travelers would get a break. Average rates had risen steadily each year since 2004 by as much as 7.5% nationally, vs. the 3.5% long-term average, he says.

"There was so much demand for hotel rooms in so many markets that managers were able to achieve extraordinary rate increases year after year," he says. "Now, the pendulum has swung from being in the seller's favor to being in the buyer's favor."

Hotels across the USA are trying to appeal to customers with promotions, discounts or other perks. The Hotel Indigo in the Chicago suburb of Vernon Hills, for instance, is offering guests a $25 gift card when booking a room under its "economic stimulus" package through Jan. 31.

The average hotel rate for New York City ($309) already dropped by nearly 6% for the first four weeks of October, vs. the same period a year ago, says Jan Freitag of Smith Travel.

•Fewer extravagant junkets. Some companies stopped planning over-the-top meetings after Congress blasted AIG for spending $440,000 on a week-long executive retreat at the St. Regis in Monarch Beach, Calif., following its government bailout. "That certainly didn't play well with anybody," Smith's Freitag says.

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