The Real Deal New York

Double-dip discounting for city hotel rooms

Corporate buyers seek additional markdowns on room rates

April 01, 2009
By Catherine Curan

New York City’s hotel sector, already struggling with lower occupancy rates and prices, has a new challenge: corporate buyers seeking to renegotiate previously set bulk contracts. Prices for blocks of rooms that were locked in late last year at discounted corporate rates are now being shifted again — downward.

Hoteliers are loath to discuss the disquieting new trend, which is taking place all over the country. In a February survey by the Association of Corporate Travel Executives (ACTE), 61 percent of respondents said they had approached their suppliers for midcontract rate reductions.

Of that group, 81 percent focused on hotels, including many in New York, which along with Hawaii has the most expensive rooms and meeting facilities in the U.S.

“Increased hotel business is obviously going to go to companies and properties willing to deal,” said Jack Riepe, North American communications director for ACTE, a non-profit association based in Alexandria, Va.

The new round of dealmaking reflects the stark reality that the hotel industry’s health has deteriorated sharply — and full-year 2009 forecasts have grown far gloomier — since rates were hammered out last fall.

For the year, hotel industry research firm PKF Consulting forecasts that New York City occupancy levels will be down 12 percent, with room rates down 16 percent. Those twin declines will push revenue per available room, a key measure, down 26 percent.

“That’s a much bigger decrease than we thought at the time when those corporate rates were negotiated,” said John Fox, senior vice president of PKF Consulting.

Manhattan numbers, he said, will trend in line with those declines.

The numbers in the city are already plummeting. Last October, New York City occupancy levels stood at a robust 86.4 percent, and average daily rate, or ADR, was $358. As of February, the latest figures available at press time, the city’s tourist bureau, NYC & Company, showed occupancy levels had plunged to 66.1 percent, with ADR at $190.

“The first quarter is always the toughest, but we’re in a severely contracted market that’s going to continue into 2010,” said Fox.

As a result, even as corporations slash business travel to weather the economic downturn, they now have the upper hand as hotel operators strive to fill rooms however they can. Newly reduced corporate rates are showing up at several local hotels — from such major players as Marriott’s New York City hotels to smaller boutique hotels, including the Library.

In New York City, Marriott operates about 5,000 rooms across several hotel properties, including the business meeting and trade show stalwart Marriott Marquis in Times Square. Many of the local Marriotts rely more heavily on business travelers than leisure travelers or tourists to fill their rooms.

Given this need for corporate guests, area Marriotts have been receptive to representatives from long-term corporate accounts that now are seeking to shave costs because of the economic crisis, a spokesperson said.

“Yes, some corporate accounts have come back to us to renegotiate rates,” the spokesperson said. “We’ve gone back to our strong corporate accounts, and if in some cases we have renegotiated a rate, it’s based on the longevity of the client and working with that individual client on a one-on-one basis.”

The spokeperson said midcontract renegotiations are not unprecedented, but probably are occurring more frequently now because of the economic crisis. She also noted that the meetings and conventions business nationwide has taken some lumps following public outcry over luxury junkets for executives at AIG and other firms that accepted federal bailout money.

At the Library, a boutique Madison Avenue hotel with 60 rooms, occupancy levels remain above 80 percent — but the hotel is still offering sweeter deals to corporate clients. The company dropped corporate room rates about 6 percent, or an average of $20, from 2008 levels. In addition, if a special rate is lower than the corporate one, the Library now gives clients the special but allows them to apply it to their required number of corporate bookings for the year, said Yogini Patel, director of sales and marketing.

Corporate guests account for about one-third of a hotel’s business on average, so these newest discounts are only adding to the pressures on profits. Also, New York has thousands of new hotel rooms coming online over the next few years, adding to the glut built since 2006 under false expectations that the boom in room rates and occupancy levels would continue.

PKF’s Fox expects the bite to profits will result in refinancings rather than many outright closures, noting that happened during the last downturn. But other hotel experts are worried about the impact of so many profit-draining measures — from renegotiated corporate discounts, to the seemingly endless wave of leisure travel specials this year, to the continuing cutbacks by cash-strapped companies and consumers — on the ability of local hotels, especially newer properties, to endure the downturn.

“You need heads in the beds to pay the expenses, including debt service,” said Alan Miller, senior director and principal with Eastern Consolidated, and broker on some of hotel titan Sam Chang’s biggest deals. “Unfortunately, I think there will be a lot of hotel failures in the next year or two.”

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