By Bjorn Hanson, PhD., Clinical Professor at NYU School of Professional Studies Jonathan M. Tisch Center for Hospitality and Tourism
As the corporate and contract rate negotiation season is about to begin, the 2017 outlook is for a change in the balance of power from sellers to 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 contract rates in decades of typically between 5.75 to 7 percent for 2016, the forecast for 2017 is for increases on 3.25 to 4.0 percent. Overall average daily rate (ADR) for the U.S. lodging industry is expected to increase approximately 4.5 to 5.0 percent in 2016, with smaller increases for 2017 of 4.0 to 4.5 percent. U.S. hotel occupancy in 2015, approximately 65.5 percent, was the highest since 1984 and consensus forecast for 2016 at the time of the negotiations was for occupancy to increase, so the balance of power in negotiations favored sellers. Actual occupancy will be slightly lower than occupancy in 2015. There are four 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.
CFOs and corporate managers are generally facing a challenging earnings environment, and many are attempting to control travel costs, especially for hotels, when these costs, including hotel room rates, are increasing at approximately double the rate of inflation. The U.S. General Services Administration issued the increase "standard rate" of 2.25 percent effective October 1. There are several practices to respond to average daily rate increases:
- Buyers are including more upscale, select service and limited service hotels in addition to or in place of upper upscale hotels and full service and luxury hotels.
- More and more corporate travel departments are allowing travelers to select hotels that are not included in the portfolio of hotels with negotiated rates. This can be especially popular among younger travelers and can have the effect of lowering the overall average rate paid while increasing employee travel experience satisfaction. Although Airbnb is not "mainstream" as a corporate or convention lodging choice, it is increasingly being considered or offered by corporate travel department or event sponsors.
- There continues to be greater enforcement of corporate travel policy and auditing of employee expense reports and hotel compliance with travel policy.
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.