Small Inn and Bed and Breakfast Industry Articles

Joe Sharkey
February 2, 2009

Business travelers are generally fond of the hotel industry, which is a lot more than can be said of the airline industry.

In the last 10 years, hotels have steadily improved products and services, and now we routinely expect consistency, convenience and comfort at hotels at most price levels.

Take bedding, for example.

Ten years ago, Westin Hotels introduced its multilayered Westin Heavenly Bed, and even began selling the beds online to happy customers. Competitors followed. Today, there is hardly a hotel in the midlevel category or above that doesn’t feature high-quality bedding.

The hotel industry started a revolution in the retail bedding industry as frequent travelers came home and decided, as one female business traveler told me, “My own mattress was junk and I needed to upgrade to hotel standards.” Few travelers, it should be added, would talk of a wish to upgrade to “airline standards.”

Yes, times were good for hotel owners and managers in recent years, as demand and revenues surged.

But that’s over now. Hotel companies are reporting steady decreases in revenue, occupancy and average room rates. For example, Starwood Hotels & Resorts, which owns the Westin, Sheraton and other brands, reported last week that revenue per room in North America fell 13.2 percent in the fourth quarter. Starwood said it anticipated “a significant decline” in worldwide room revenue this year, and planned a “significant” reduction in capital spending.

The good news for business travelers is that pricing power has shifted strongly away from the seller to the buyer. So it’s a great time to shop for bargains.

But anxiety is rampant now in the hotel industry. Some owners are terrified as debt payments come due and revenue drops. Last week, PKF Hospitality Research said that hotel owners could be looking at “one of the worst years on record,” and that the number of full-service hotels in the United States lacking the cash flow to pay debts will increase by 25 percent this year.

How does the immediate future look from behind the front desk?

Sagging demand and lower rates, said Anne Lloyd-Jones, the senior vice president of HVS Global Hospitality Services.

“Just as the room rate growth in 2008 was driven by strong demand and optimism from the year before, the influences in 2009 are the absolute opposite,” Ms. Lloyd-Jones said. “And no one knows yet what the bottom of this slump will look like.”

Demand has dropped, but not evaporated, of course. More than ever, she said, demand “is moving around,” searching for value within different price levels. At the same time, hotel managers are struggling to maintain standards and to figure out how to price their product, and where to sell it.

One new dynamic has people in the higher end of the industry confounded, incidentally. That’s the palpable backlash against perceived corporate excess, which has been driven by reports of lavish spending by companies that had received federal bailout money. After such reports began surfacing last fall, corporate travel managers became wary of approving travel expenses at luxury brand hotels.

For business travelers, it “looked better on their expense sheet if they were staying at a Courtyard by Marriott,” Ms. Lloyd-Jones said.

In this atmosphere, Marriott International, which owns the Ritz-Carlton hotel brand as well as Courtyard and others, had a problem that was different from what other luxury hotels were facing. The word “ritz,” as in “ritzy” or “putting on the ritz,” was right there in its title.

Jack vanHartesvelt, who owns several luxury hotels including the Liberty in Boston, joked about such perceptions. “The name Liberty can show up on an expense account at a room rate of, say, $365, and that’s fine. Put that same rate down with the name Ritz, and people go, ‘Hey, wait a minute!’ ”

But for all the pain now, both Ms. Lloyd-Jones and Mr. vanHartesvelt agreed, the hotel industry should be in a good position once the economy recovers. For one thing, the number of new hotels under construction or in active development is starting to decline, industry figures show.

Even with a potential for a long-lived slowdown in demand, the current oversupply of hotel rooms will shrink to manageable levels. Some inferior hotels will simply close. Some projects under development will be abandoned. And new projects are not being planned in the same numbers a year ago.

Mr. vanHartesvelt is optimistic that business will pick up in two or three years. “This is creating a window where in 2010 or 2012,” he said, “if you’re a hotel, and if you can hang around that long, as the economy rebounds and demand rises with no addition in supply from the pipeline, you could find yourself in a fun business once again.”

That’s a lot of ifs. Meanwhile, if you’re a fairly recent hotel investor, the biggest if is whether you’ll be around to join in the fun.