The finance blog Calculated Risk posted some numbers on how much hotel construction has been going on in the U.S. over the past few years, and how revenue projections are dropping like a rock.

The chart of hotel investment as a % of GDP is graphically impressive, with a recent spike that puts investment in hotels going back to 1970 to shame. That’s a lot of building.

And when oversupply meets a recession, hotels brace for declining revenue:

U.S. hotels have entered the initial stages of one of the deepest and longest recessions in the history of the domestic lodging industry according to a new report issued today by PKF Hospitality Research (PKF-HR). The 7.8 percent drop in RevPAR [revenue per available room] that the hospitality research firm is now forecasting for 2009 will be the fifth largest annual decline in this important measure since 1930.

To help fill those rooms, and to pay the bills, hotels will be offering discounts in coming months. This means more inventory on Hotwire, Priceline, and Lastminute.com; more package discounts; and maybe even lower rates overall.

Prepare for bargains!

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Categorized in: hotels

6 Comments

6 Responses to “Will hotel overbuilding mean luxury deals?”

1. 
   sara Says:
   December 17th, 2008 at 12:20 am

   I book large blocks of rooms for conferences, so I just wanted your opinion on whether you think it would be wise to renegotiate some rates for 2010? I have contracts for 2009, but am just getting to the 2010 ones – i am wondering if my group, as a good reliable consistent group might have more leverage?

2. 
   Jack - eyeflare.com Says:
   December 17th, 2008 at 8:27 am

   So when do you expect hotel rates to actually go down systematically? Right now, the rates are (somewhat) down because of the credit crunch, but there aren’t all that many real deals available. Maybe tail end of 2009?

3. 
   Mark Ashley Says:
   December 17th, 2008 at 5:21 pm

   Sara, I would bargain hard, especially if you have some wiggle room and aren’t hung up on using specific properties. Your standing as a reliable customer would likely help you get a better deal, too.

   Jack, I’m not positive when this discounting would happen, but I think we can start to see some softening as early as the new year. Much like real estate, it’s not going to be the same everywhere, either. The most overbuilt markets (Miami?) are likely to be hit first. A good indicator will be if we start to see superb deals on the services like Priceline and Hotwire that pick up the “excess” inventory.

4. 
   Mark Ashley Says:
   December 18th, 2008 at 8:27 am

   I see major media have picked up on this theme now, too:

   Time Magazine 12/17/08: “Hotels Try to Adapt to Hard Times”

   Hotels are struggling to attract patrons with everything from free breakfast to quirky promotions like an adults-only couples weekend at a resort in Bermuda, complete with counseling by sex therapists. There are more upgrades, more freebies — and more top hotels quietly offering their rooms at lower rates on Priceline.com.

   New York Times 12/21/08: “Bargains Pop Up in the Luxury Suite”

   While most high-end hotels are trying to avoid dropping room rates, many are offering discounts like free nights or “hundreds of dollars of spa or resort credits,” Mr. MacDonald said.

   and this tip:

   For the most bang for your buck, take your vacation during that sweet spot just after New Year’s. “After the holidays and before Presidents’ Week, which is traditionally a busy time, there’s very likely to be pockets of weakness,” said Scott D. Berman, a principal and hospitality consultant with PricewaterhouseCoopers in Miami, “so it’s quite practical that on the 7th or 8th of January we see a whole host of deals.”

   So it’s both an oversupply of rooms and a shortage of demand. But the oversupply may not last forever, as hotels are wising up:

   The number of hotel guest rooms falling out of the U.S. construction pipeline was up 75% in November, and industry experts expect the trend to continue.

   November figures from Smith Travel Research show 93,219 guestrooms have been abandoned in various stages of development, from pre-planning to already under construction. That figure compares to 39,887 that fell out of the pipeline in November of 2007 and is 8,729 higher than the number abandoned in October 2008, STR said.

5. Is 2009 the year of the apartment? | Upgrade: Travel Better Says:
   January 5th, 2009 at 3:34 pm

   [...] Combine an increase in recession-era demand from companies hoping to lower lodging expenses with a decline in hotel investment, and 2009 could be the year of the business [...]

6. Undaunted: World’s largest hotel planned for Las Vegas | Upgrade: Travel Better Says:
   January 9th, 2009 at 5:09 pm

   [...] timing is interesting, to say the least. Hotel overbuilding (and a subsequent recession-enhanced glut of rooms) has been the predominant theme of late, so why [...]

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