When the U.S. economy sneezes, the local hospitality industry gasps. Any economic tightening that threatens consumers’ pocketbooks can prompt a pullback in vacation plans; that can spell trouble for hotels and other businesses that rely on visitors from afar.
Recent indicators suggest that just such a problem may lie ahead. More than two-thirds of respondents to a survey by the national Travel Industry Association said they’ve downsized this year’s vacation plans because of personal financial concerns. In another survey, by AIG Travel Guard, 47 percent of travelers polled said they intend to scale down previously planned trips.
While the news sounds ominous, the numbers don’t necessarily tell the full story. Respondents to the Travel Guard survey, for instance, didn’t indicate they would refrain from traveling, they said they would cut corners by vacationing a little closer to home, eating in less expensive restaurants and staying at less costly hotels. Local hotel owners no doubt will court the drive-in visitor but they’ll also have their fingers crossed for continued strength in the corporate travel sector. Big meetings and conventions gobble up large numbers of hotel room-nights and, so far at least, the city isn’t seeing evidence that conventioneers have lost their appetites.
“Our theory is that a choppy economy hits individual leisure travelers harder than the convention travelers,” says Jan Frietag, a vice president at Smith Travel Research in Hendersonville, Tenn. He says he has seen no indication that corporations are clamping down on travel or conference budgets.
“Our data does not suggest anything but a slowing. We’re certainly not calling it a recession,” he says. He adds that recent reports from publicly traded hotel companies don’t suggest they’re seeing meeting cancellations. “That’s great news for a city like New Orleans,” he says.
Frietag warns, though, that concerns still hover over the local hotel industry. New Orleans hotel occupancy figures for 2007 came in almost 8 percent below the averages for 2006. Despite peaks reached during big events, such as Mardi Gras, on average local hotels were just 58 percent full last year.
Average revenue per available room – a key indicator of hotel vibrancy – declined more than 9 percent in New Orleans during 2007, Frietag says. The drop stems, in part, from the fact that hotel rooms damaged or closed by Katrina-related events have gradually come back on line, adding inventory faster than room demand has grown. New Orleans had about 33,500 hotel rooms at the end of 2007, roughly 5,000 fewer than before Katrina.
While demand for rooms has picked up in the last two years, the city’s hotels sold fewer than 7 million room-nights in 2007, down from almost 9 million during the peak year of 2004.
Ordinarily, an oversupply of rooms leads hotels into a bout of rate cutting and local inns have lowered their rates somewhat to adapt to current circumstances. However, the average daily rate at New Orleans hotels remained above $116 per night in 2007, down just 2 percent from 2006.
“It’s nice to see that the hotels aren’t really slashing their rates,” Frietag says. “Most of them are maintaining their price integrity and that’s good.” He points out that the local room rate remains well above the U.S. average of $103.60, though it’s below the $128.50 average of the top 25 hotel markets (which includes New Orleans).
The continued mixed performance of local hotels helps explain why New Orleans landed at the bottom in a recent ranking of cities where hotel investors are likely to put their money. Ernst & Young’s 2007 Investment Survey of U.S. hospitality professionals predicts that money will continue to flow into new hotels, nationally, at least through mid-2008. The survey indicates that already high-performing markets such as Washington, D.C., Manhattan, Los Angeles, Chicago and San Francisco will continue to draw new investment. As many as 10 percent of the survey’s respondents said that one or more of those cities is likely to attract their capital within the next 12 months. In contrast, just over one percent of respondents expressed an interest in putting their money into New Orleans.
That said, a California investment firm appears to be in the contrarian minority. Newport Beach-based Clearview Hotel Capital put up $68 million in January to buy the 500-room J.W. Marriott Hotel on Canal Street from the Dallas firm that had owned it for less than a year.
Clearview President Jon Kline commented that his company is confident of a “robust recovery of New Orleans as a convention and travel destination.” He said his company will refurbish the guest rooms and begin searching for a tenant to take a street-level storefront in the building. Local hospitality executives hope that such investments will help keep the attention of the traveling public focused on New Orleans.
Meanwhile, Frietag emphasizes that the city remains one of the country’s major markets in terms of overall room rates. “From the hoteliers’ perspective, that is awesome,” he says.
While he concedes that the slow economy is likely to give hotels a bumpy ride through the first half of this year, Frietag predicts that the third and fourth quarters will produce a recovery in the hospitality sector, with both occupancies and rates again beginning to grow.