TREND ANALYSIS REPORT
October 27, 2016
By Bjorn Hanson, PhD, Clinical Professor
NYU School of Professional Studies
Jonathan M. Tisch Center for Hospitality and Tourism
As the 2017 corporate and contract rate negotiation season is in progress, U.S. lodging industry average daily rate growth is slowing much more than expected. The 2017 outlook already anticipated a change in the balance of power from sellers to buyers, and the slowing rate growth is providing even more strength to the negotiating position for the buyers.
Corporate and contract rate negotiations generally begin during September and continue into December. Corporate and contract rates represent almost 20 percent of occupied U.S. room nights and almost 30 percent of U.S. lodging industry revenue.
Following among the largest percent and dollar increases in corporate rates in decades of between 5.75 to 7 percent for 2016, the prior forecast for 2017 was for corporate rate increases of 3.25 to 4.0 percent, and 4.0 to 4.5 percent average daily rate (ADR) for the U.S. lodging industry.
The actual ADR increase reported by Smith Travel Research for September YTD is 3.3 percent.
The slowing rate growth has resulted in many public companies lowering guidance for the rest of 2016 and next year. Most firms issuing forecasts have also lowered their ADR forecasts for both the rest of 2016 and 2017.
The revised forecast for 2017 for corporate rates increases is 2.75 to 3.5 percent and overall ADR for the U.S. lodging industry to increase by 3.0 to 3.5 percent in 2017.
There are now five factors that will have the greatest effect to shift the balance of power from the sellers to the buyers:
- Although 2017 U.S. lodging industry occupancy will be high relative to long-term averages, it is forecast to be lower than it was in 2016, which will have been lower than occupancy in 2015.
- The negotiations for corporate rate increases in 2016 were at a time when there was an expectation for larger rate increases than actually occurred; many corporate travel managers and convention planners believe they have been overpaying in 2016 and will seek to recover some of that “overpayment” in 2017.
- Some corporate travel managers and convention planners have been surprised at the published “member rates” and non-refundable rates published on brand websites because they can be lower than the corporate, contract, or convention rates that were expected to be lower than rates available to the public. These published rates are part of major and long-term initiatives to respond to the power of and commissions earned by on-line travel agents (OTAs).
- Airbnb, which has not generally been embraced by corporate travel managers and convention planners, has been “endorsed” through business relationships with American Express Business Travel, BCD Travel, and Carlson Wagonlit Travel. Also, Airbnb has announced and promoted its Airbnb for Business and Business Travel Ready programs, and Chip Connelly, Airbnb’s head of Global Hospitality & Strategy, has made public comments about Airbnb’s focus on group and convention demand.
- The fifth and new factor is that corporate travel managers are becoming aware of slowing rate growth and anticipate there may be future downward revisions for guidance and forecasts, and are emphasizing that if the current forecast is incorrect, the revisions will be for lower, not increased rate growth.
The U.S. General Services Administration issued the increase “standard rate” of 2.25 percent effective October 1.
These estimates included in this report are based on selected interviews with industry executives and corporate travel executives, analysis of industry financial data, press releases, and information available on hotel and brand websites.
About the Author
Bjorn Hanson, Ph.D., is a clinical professor with the NYU School of Professional Studies (NYUSPS) Jonathan M. Tisch Center for Hospitality and Tourism. He is a hospitality and travel researcher, widely respected for his industry forecasts and for having created econometric models that transformed business analysis in the field. He has served as divisional dean of the School’s Preston Robert Tisch Center for Hospitality, Tourism, and Sport Management and as co-interim dean of the NYU School of Continuing and Professional Studies (now the School of Professional Studies). Prior to joining NYU, he held the position of global industry leader, hospitality and leisure, at PricewaterhouseCoopers LLP.