RSBA & Associates 
Hospitality Consulting Services
400 Spear Street, Suite 106
San Francisco, CA 94105
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 Here Today…but Tomorrow?
by Rick Swig - November  2000

There are increasing headlines screeching “No Room At The Inn” or “Cities Running Low in Accommodations”.  And it is true.  There is prosperity in the hotel business, and it is grander than any which has been experienced in several decades.  San Francisco, New York, Miami, Boston, and New Orleans among others have experienced continual surges in occupancy and average daily rates.  Then again, there are the smaller, mid-week markets, including the “Silicon Valleys” of San Jose, Northern Virginia, and New Jersey’s Research Triangle, where high tech business expansion is dramatically driving hotel revenues.

Market specific demand trends, even as these apply to localized neighborhoods, characterize the nature of the hotel business.  Regional or statewide and certainly, any national evaluation may be limited in importance, as the generic view of relatively stable national occupancies with 3% - 4% rate growth does not describe the important or accurate portrayal of most states, regions, or cities. 

The major markets always seem to gather all of the headlines, but the real story may be in the second tier cities and suburbs.  Supply growth in many big cities has begun to be stifled by barriers to entry due to land availability or expense associated with development.  Additionally and for the same reasons, new commercial areas have begun to blossom in alternative urban or new suburban locations, which have brought along the need for new hotel supply. 

These new and developing markets are often quick to mature as commercial centers, as they are suddenly the center of high tech research and/or other manufacturing.  Evolution sprints in these areas, as their commercial office and hotel assets portray seemingly instant low vacancy or high occupancy rates.  At the same time, however, the real depiction of these marketplaces is one of over-achieving adolescence with areas of extreme immaturity.  The burst of commercial activities generally overshadows the lack of recreational or lifestyle attraction infrastructure, which exposes these new neighborhoods as single dimensional – good for business activities and little else. 

The hotel occupancy trends in these new commercial neighborhoods are strikingly similar with close to sell out demand with relatively premium rates between Monday and Thursday nights, then a 30% -50% decline both in demand and average daily rate on Friday, Saturday, and Sunday nights. 

Quite often mid-week marketing activities have more to do with brand strength, frequent guest programs, inventory availability and yield management than they do with customer relationship and sales development.  On the weekends hotels in single dimensional markets compete for soccer tournaments, marriage encounter seminars, and other special interest groups, which are looking for the highest quality at the cheapest rate. 

The hotel mid-week harvesters become the weekend scroungers, while additionally becoming schizophrenic service providers.  Many hotel’s mid-week and weekend customer bases have totally different needs, expectations, and spending habits.  The lucrative profitability of the weekday is often undermined by the low margin customer options on the weekends. 

In most Commercial transient segment driven marketplaces the weekday opportunities still provide enough financial sustenance to successfully offset weekend compromises.  Markets like San Jose, the Research Triangle of northern New Jersey, or the selective high tech driven neighborhoods of suburban Washington D.C. in Northern Virginia are thriving on their “new economy” activities with demand from individual business travelers alone.  In fact quite often during mid-week periods there is little, if any, inventory available for traditional sales or training group meeting demand.  As a result, these single dimensional markets are narrowing their customer targets even more.

The growth trends in these new geographic markets with their heavy demand, although narrow segmentation, have stimulated new supply development.  The mix of new product is typically the same: economy (ex. Sleep Inn, Microtel), limited service (ex. Hampton Inn, Holiday Express, Wingate Inn), quasi-full service (ex. Courtyard, Hilton Garden) or various tiers of extended stay (ex.  Residence Inn, Homewood Suites, Summerfield Suites, or Homestead Village).  These products, although different in scope and price target market segment, are similar, as none feature significant meeting space and the ability to support anything but the transient traveler.

New traditional full service supply now rarely seems to advance off the planning table.  This either is due to development cost versus potentially inadequate (or unattractive) financial returns or lack of lender financing support.  Even when long term market trends based on professional studies indicate the need for new full service development, the path of least resistance (and short term financial gain) through lower cost, limited service expansion is often chosen.

The limited horizon view of current hotel development may have some critical residual impacts.  Hotel developers or the industry may have unwittingly forgotten some traditional trends and market segment mixes, which become more apparent in less booming economic times when Commercial transient demand subsides.

The future may have current Commercial transient trends reversing with the Group meetings segment at some point.  If this occurs, there will be a need for more meeting space plus related meetings and banquet services.  When the customer trends and needs change, recent product development with total focus on the requirements of today’s transient pressures may not be in a position to handle the customer segment demands of tomorrow.

If this editorial is completely off base, then current product mixes in the new Commercial segments will merely have to defend against new supply, while continuing to focus on the evolutionary process of their individual communities from something more than weekday commercial centers.  If indeed, customer demand for overnight stays requires more than just bed and free breakfast, then there will be a great deal of hotel supply, which is unequipped for the needs of tomorrow’s marketplace.  The hotel industry may be too focused on today’s business picture without considering an adequate vision of the future.

RSBA & Associates
400 Spear Street, Suite 106
San Francisco, CA 94105
Tel:  (415) 541-7722
Fax: (415) 541-5333
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