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.

The backlash — the "AIG effect" — was surprisingly swift, he says. The average occupancy rate for luxury hotels dropped by nearly 12%, and rates dropped by more than 5% for the first four weeks of October, vs. an 8% occupancy drop and less than 1% rate drop overall, he says. The financial, insurance and real estate industries "specifically are going to be very, very careful (about) how they spend their money and what the public perception is," he says.

•Smaller hotel staffs. As they accommodate fewer guests, hotels are cutting payrolls. According to the Bureau of Labor Statistics' October jobs report released last week, the hospitality sector shed enough jobs to cause unemployment for the sector to soar to 8.9% — the highest rate for an October this decade.

Business travel is forecast to decline by nearly 4% this year, and another 3% next year, the Travel Industry Association said in its annual forecast last week. It isn't expected to recover until 2010.

"We all know businesses are having to make decisions to scale back in this current environment. Business travel is no exception," says the TIA's Suzanne Cook.

Internal meetings, such as visits to headquarters, are especially vulnerable, because they're easy to replace with Web meetings or teleconferences, she says.

In its business travel forecast to be released today, the National Business Travel Association says that 81% of its corporate travel managers expect technology to replace trips. Three out of every four respondents reported an uptick in teleconferencing alone.

Charles Emnett, a self-employed health care consultant based in Spring Hill, Fla., typically stays at Hilton Homewood Suites, Hampton Inns and other hotels for stretches of as long as three weeks at a time at client sites. But next year, he expects to do more work using conferencing technology to curb travel costs. He welcomes the change.

"Do I really like to spend 200 nights a year in a hotel room? Not particularly," Emnett says.

TELL US: Is your company cutting business travel for 2009? If so, will conferencing technology be used more to compensate?