News for the Hospitality Executive
The Fed Rate - Government Travelers Welcome in 2009
By Robert Mandelbaum and Reed Woodworth,
For hotels in the upper-tier chain scale categories, government travelers have historically been viewed as “guests of last resort.” While government business is abundant, the per diem room rates set by federal, state, and local agencies are generally viewed as low. In addition, ancillary expenditures for food, beverage, retail, and recreation are restricted by government limits that are typically less than the average business traveler’s budget.
As of December 2009, PKF Hospitality Research (PKF-HR) is forecasting that the average daily room rate (ADR) for U.S. hotels will decline 8.8 percent in 2009, and fall another 1.5 percent in 2010. Concurrently, hotel occupancy rates are forecast to be 55.0 percent in 2009 and 55.2 percent in 2010, the two lowest levels of occupancy observed since Smith Travel Research (STR) began reporting data in 1988.
Given the dire market conditions, hotels in the upscale, upper-upscale, and luxury chain-scales that have historically shunned government travelers have taken a second look at this demand segment. Due to this expanded interest in government demand, we have analyzed the historical and future movements in federal per diem lodging rates, and compared them to the actual and forecast ADRs achieved by U.S. hotels. The analysis was performed for a sample of 48 of the nation’s largest hotel markets for which PKF-HR produces Hotel Horizons® forecast reports.
It is important to explain federal per diem lodging rates in order to provide some context to the comparisons we made to actual hotel ADRs. The following factors have an influence of why per diem rates may, or may not, vary from the average daily room rate for a market.
From 1997 through 2008, the average per diem rate for our sample of 48 cities was $101.24. This is 6.6 percent greater than the nominal ADR of $95.00 for the 12 year period. Part of the difference can be explained by the dissimilar methods used to calculate annual averages in the seasonal markets. However, the higher per diems can also be attributed to the fact that in several cities, government travelers are directed to stay at a select group of relatively expensive properties located closer to the central business district, as opposed to the more moderate-priced suburban hotels.
Federal Per Diem Hotel Room Rates - Historical
Comparison – 48 U.S. Cities
Not only have per diem rates, on average, been greater than the actual ADRs historically achieved by hotels, but they have grown at a slightly greater pace. From 1997 to 2008, the federal per diem lodging rates in the 48 cities studied grew at a compound annual average (CAGR) of 3.2 percent. This is greater than the 3.0 percent growth observed for ADRs during the same time period. The majority of the excess growth in lodging per diems occurred during the years 2000 through 2003, and 2008. These were recessionary years for the hotel industry when metro area room rates were either on the decline, or growth was severally limited.
Overall, the federal lodging per diem for a city exceeds the actual annual ADR for that market approximately 66 percent of the time. Except for the years 1999 and 2006, the majority of cites in our sample had lodging per diems that were greater than the market’s annual ADR. The number of cities with above average lodging per diems was greatest during the 2003 and 2004 post-recessionary years of recovery.
Good Business for Bad Times
Like most lodging industry analysts, the GSA could not predict the extent to which hotel room rates would fall in 2009. Using the 6.3 percent increase in ADR during calendar year 2007 as guidance, the GSA set a 7.0 percent average rise in lodging per diems for the 48 city sample in 2009. As we know now, this will be approximately 16 percentage points greater than the 9.0 percent decline in ADR forecast for these cities in 2009.
Federal Per Diem Hotels Rates vs. Actual Metro
As a result of the dramatic discounting, rate compression has made luxury and upper-upscale hotels competitive with moderate-priced properties for government travelers. Despite the reduced room rate, government demand in the current market conditions represents a relatively predictable base of business for upper-tier properties.
Looking towards 2010, the GSA has recognized the discounting that is occurring in the hotel industry. On average, the lodging per diems for the 48 market sample are set to decline 0.5 percent. This is just under the December 2009 Hotel Horizons® aggregate forecast for these same cities. Despite the decline in the prescribed per diems, the actual average lodging per diem for 2010 ($130.13) is still 14 percent greater than the forecast ADR ($113.97) for the 48 city sample due to the great disparity observed in 2009.
While it is easy for hotels to avoid government business because of the perceived low room rates, long-term history shows that it can be a steady source of demand with rates that grow in excess of ADRs. And, during times of distress, the government can actually be a source of premium-priced room nights.
Robert Mandelbaum is Director of Research Information Services for PKF Hospitality Research (www.pkfc.com). Reed Woodworth is Vice President in the Boston office of PKF Consulting. He supervises the firm’s government consulting practice. (www.pkfc.com). This article was published in the November 2009 edition of Lodging.
|Also See:||FY2010 Federal Per Diems Reflect Weak Economy; The Standard Continental U.S. (CONUS) Per Diem Rate for Lodging Remains the Same as Last Year at $70 per Night / August 2009|
|Hilton Hotels Provides Booking Portal for U.S. Government and Military Employees - hiltongov.com / June 2008|