Real Estate Forum - August 2008

It is difficult to maintain rates because you’ve got a manager who says, “Oh my gosh, I need to cut my rate because I’m going to lose business.” Cutting rates may not be necessary because doing so might not induce demand if that demand just isn’t there. Perhaps it might work on weekends for leisure travelers, but if somebody needs to travel for business, they’re going to do so. Cutting the rate may not make them travel more.

“If you are an owner, your asset is probably substantially less valuable than a year ago because of changes in the capital markets.”

DAVID LOEB

ROBERT W. BAIRD & CO. INC.

HAMILTON: We work so hard to get those rates up. And if we give it up now, it will take a long time to bring it back to current levels. Our philosophy is to deploy more salespeople and get a bigger share of the business that’s out there.

JOHNSON: You can be smarter by adding value and giving guests a little more to get the occupancy, rather than cutting rates. We’ve learned a lot from earlier in the decade, and we play with third-party sites a lot differently than before. The brands have set up regulations that the lowest rates are available on their own sites. I’m not saying that as we get further into the cycle we won’t have to discount rates, but we’re a lot smarter about revenue management than we were 10 years ago. GORDON: The Internet booking craze began early in this decade, and a lot of the hotel companies and managers really didn’t have their Internet strategy down. We then had an

“You can be smarter by adding value and giving guests a little more to get the occupancy, rather than cutting rates.”

NANCY JOHNSON

CARLSON HOTELS WORLDWIDE

unexpected economic downturn and, as a result, a lot of people were caught without a game plan. That exacerbated rate dumping. People are now better equipped to manage that situation.

TRESS: If you know your soft spots, you can use the Internet effectively, and target customer groups to bring them back to the hotel. You can play with the segmentation and not discount the rate.

MENDELL: There are different rates. You have retail rates, negotiated contract rates and group rates. In the last two or three weeks, we’ve really started to see retail rates drop, so we’ll watch that to see what the industry does. But negotiated rates aren’t going to change until the fall, when it’s bidding season for the annual contracts.

JOHNSON: Corporations are in the same position as we are and they’re going to be tough negotiators. Over the last few years, hotel companies have been able to negotiate floating rates with corporate accounts. When demand is high, companies would have to pay higher rates. In a slow economic environment, it’s a buyers’ market, and corporations can dictate the terms and be more aggressive on the discounts they ask for from a hotel.

MENDELL: We’re also starting to see, in some markets, a full-service hotel losing business to a select-service hotel of the same brand. It may be a Hilton customer going to a Hilton Garden Inn or a Marriott customer going to a Courtyard or a Sheraton customer going to an Aloft to save $20 or $30. Does that happen across the board? It’s too early to tell.

JOHNSON: It’s all about consumer confidence. As that confidence erodes, they will trade down, and we have seen them do it.

LOEB: Corporate profits are going to enter into that equation as well. They’ll be trading down across the board.

WOOD: How long will the recession last?

LOEB: That’s a really tough one to answer. The economy will

“It’s a question of when will debt become available again, and I don’t think any of us knows the answer to that.”

GARY MENDELL

HEI HOTELS & RESORTS

get worse and so will the psychological impact. It’s unusual to have a recession this late in a Presidential term, but we’ve got it and it’s going to be here for a while. And I’m not overly optimistic about next year. Unfortunately, we had easy money until the end of last year. There’s a lot of supply in the pipeline. Limited-service projects continue to find financing. As a result, we may have slow demand and greater supply.

GOLDMAN: I agree with you, particularly for the back half of this year and ’09. The bigger hotels that were financed before the capital markets closed down are due to come on line at the end of this year and early into the next.

MENDELL: This is really a two-part question. It’s the fundamentals of the economy combined with the supply and demand for hotels. Then there’s the capital flow situation.

GDP and room demand growth goes with the economy. Supply is fairly predictable and not an issue right now. Certainly demand is related to the health of the economy, while pricing is related to how well operating companies can manage rate growth.

The other aspect is the capital markets. There is plenty of equity. It’s a question of when will debt become available again, and I don’t think any of us knows the answer to that. It’s not something I deal with every day, but I’m hearing it’s going to be in the two-year range before anything starts to move in the right direction again.