Hotel rates – slip sliding away?

With few exceptions hotel rates around the world seem to echo the lyrics of the 70's Simon and Garfunkel song, Slip Sliding Away where the duo croon "You know the nearer your destination, the more you slip sliding away". The proximate cause remains the flaccid global recovery but in many destinations from New York to New Delhi it is the near exponential growth in inventory coming on line even as there are whiffs of a nascent economic recovery.

At the end of the first quarter of this year PKF research and more recently  Advito, the travel consulting unit of BCD Travel both predicted, on average, decline in hotel rates through the rest of this year. Advito now predicts rate declines in a number of markets ranging from a low of 1.6% in North America to 4.5% in China. Curiously, in India, a market that has often been touted as the growth market for hoteliers and developers of all stripes, declines in rates have been brought about by a surge in  supply combined with a decline in foreign tourist travel. As a result rates have been hiked by 25% by the domestic hotel association. That move would have been deemed illegal were it to have occurred in the US, Australian and a number of other countries. 

In the US, particularly in New York City, occupancy growth brought about by strong tour and travel trends has been accompanied by anemic rate increases which may well see a plateauing if not sliding given the fact that supply shows no sign of abating as noted in a recent Wall Street Journal article aptly titled "Room for All? Rush of Hotels Check Into City". With an "8.5% expansion of the city's room supply" per Lodging Econometrics for the first six months of 2010 alone, the resulting outward shift of the supply curve necessarily causes a decrease in the equilibrium price. Rates are likely to be further depressed if the distressed hotel scenario gets bleaker as a consequence of lenders being forced to face up to declines in hotel values resulting in loan defaults that inevitably have a negative impact on hotel rates. And there are ominous signs with regard to the latter, as Fitch noted last week that "hotels had the highest delinquency rate in June at 18.6 percent".

The foregoing is of course, good news for the travelers, both corporate and tourists, as affordable hotel rates compensate for rising air fares brought about by an uptick in airline load factors. Eventually, perhaps in 2012 once the influx of supply has been absorbed, hotel rates too will stabilize and will start to tick upwards.

Published by

Vijay Dandapani

Co-founder and president of a New York based hotel company for 24 years. Grew the firm to five hotels in Manhattan and also developed a greenfield project at MacArthur airport, New York. Speaker at numerous prestigious forums including Economy Hotels World Asia, Lodging Conference, NYU, Columbia University Real Estate Roundtable, Baruch College's Zicklin School and ALIS. President and ceo of New York City Hotel Association since January 2017.