Aug. 15, 2008 - Occupancy at area hotels is slipping, as the nation's economic troubles have resulted in weaker demand for business travel around the country and in Houston.

Areawide, occupancy is expected to dip about 1 percentage point by the year's end to 66.5 percent, hotel consultant John Keeling said at a meeting Thursday of the Hotel & Lodging Association of Greater Houston.

"It's reflective of what's going on in the rest of the country," said Keeling, senior vice president of PKF Consulting in Houston. "Because we're better diversified, we're affected by it."

Last year, PKF predicted Houston-area hotel occupancy would reach 70 percent in 2008. But that was before the extent of the economic downturn was known.

The drop in demand comes at a time when local hotel construction is increasing.

In its 2008 report of the Texas hotel industry, PKF estimates about 1,600 more Houston-area rooms will come online this year and that 3,500 more will be added in 2009.

Some markets could end up with a little more supply than they need.

The number of rooms in the Katy Freeway market, for example, is expected to grow by 26 percent between 2007 and 2009.

"In the short term, the Katy Freeway may have a little indigestion, but they're a good demand generator," Keeling said.

Still, today's tight credit markets could put a lid on projects in the pipeline.

Burned by real estate losses, some banks have limited the amount of money they're lending for commercial development.

Many are careful about whom they loan money to.

"Anybody trying to develop a hotel these days is having a hard time finding financing," said Joan Johnson, president of the Hotel & Lodging Association of Greater Houston, which helped compile data for PKF's study.

Fewer properties, however, will benefit existing operators, particularly in parts of town where demand is stronger.

Hotels in the Galleria area, the Texas Medical Center, Bush Intercontinental Airport area, Clear Lake and Stafford/Sugar Land are expected to end the year with occupancies of 70 percent or more, according the report.

By some measures, Houston is outperforming the nation.

Occupancy among the top 25 metro areas was 57.8 percent during the first quarter, compared with 67 percent in Houston, according to PKF research.

Keeling expects business to pick back up in 2009, but there are a number of uncertainties, such as continued consumer credit defaults and geopolitical turmoil.

"You can bet that's going to be dislocating to the economy" should that happen, he said.

Stan Skadal, senior director of sales and marketing at the Hyatt Regency Houston, said business is good at the downtown hotel, even though 126 rooms are out of commission because of renovations.

He is concerned, though, about potential changes in the government's tax policy as it relates to energy after a new president is elected.

About half of the hotel's business comes from corporate travel, and almost all of it is energy-related.

Despite the overall drop in demand, hoteliers have been able to raise their rates, although the rates of increase have been slowing.

Average daily rates in the Houston area are projected to rise from $103.92 in 2007 to $108.50 this year and $112 in 2009.

Rooms downtown are expected to average $167 by the end of the year, the highest in the city.

Even though convention demand won't be as strong in 2009, Keeling said, business travel is expected to pick up, driven by energy, transportation and health care industries.

Houston's ability to compete for conventions would improve if downtown had more big hotels, industry experts say.

Of all the major downtowns in Texas, Houston's has the smallest inventory of rooms.

The Texas Medical Center, Keeling said, is also in need of more hotels. But with few developable sites, most of the construction is on the outskirts.

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