More room at the inn

More room at the inn

hotel trends by Jean Gruss | Editor/Lee-Collier

Hoteliers along the Gulf Coast are concerned about the increasing supply of new hotel rooms as demand continues to decline. A surge in European tourists could offset a softening U.S. economy.

Demand for hotel rooms along the Gulf Coast was so strong during the recent boom that hoteliers pushed up rates even as fewer customers filled their hotels.

Falling occupancy rates didn't matter. After all, a limited supply of hotel rooms meant operators could push rates higher without impacting profits.

That may be about to change.

A large number of new hotels are scheduled to open this year just as the economy appears to be slowing. Many of these hotels were planned during the boom years as the strong rate growth attracted developers.

Now that the economy threatens to slow, hoteliers are concerned about the increasing supply of new rooms and lower demand. Even in Naples, widely considered the most upscale market along the Gulf Coast, data from Smith Travel Research shows a drop in demand for the third year in a row.

A drop in demand is often a leading indicator of an economic downturn, says Rich Conti, president of The Plasencia Group, a hotel consulting firm in Tampa. "We're a good barometer," Conti says.

Still, Conti says the Tampa Bay area benefits from continuing population and corporate growth. Even if there's a decline in economic growth, the region won't be hit as hard as other cities that are experiencing little or no growth.

In almost every area along the Gulf Coast, the market appears to be bifurcated. Luxury hotels on or near the beach are full while inland properties tend to be struggling. Corporate and leisure guests at luxury hotels are still spending the money they budgeted last year, but inland hotels built near booming residential areas are suddenly facing lower occupancy rates because of the downturn in residential construction and investment.

Looking ahead, the tourist season that stretches from January to April appears to be relatively strong based on anecdotal evidence from resort hotels. However, hoteliers report guests are more concerned about rates than before. And business travel can easily be slashed if corporate profits decline.

Airport traffic is slowing, too. At Southwest Florida International Airport, for example, Executive Director Robert Ball forecasts 4% passenger growth this spring, slower than the 8% growth in the same period in 2007. The Fort Myers airport reported a 1.4% year-over-year monthly drop in passengers in November, the first annual decline in that month since 2001, the year of the terrorist attacks in New York and Washington D.C.

The drop in demand is a big concern. "That's definitely a warning sign," says Jan Freitag, vice president with Smith Travel Research. For the year through November, Smith Travel's data shows a 2.6% drop in demand for rooms in the Tampa Bay area, an 8% fall in Sarasota-Bradenton, a 1.2% dip in Fort Myers and a 2% decline in Naples.

One salvation could come from European tourists, bankrolled by a strong euro currency. Europeans tend to stay longer and spend more money, so hotels are actively courting them. Still, Florida must compete with new and closer destinations such as Dubai in the Middle East and it must overcome the hassles of U.S. Customs for foreign visitors.

But don't expect room rates to reflect the changing environment immediately. "A price war is always the last resort," Freitag says. Instead, hotels are more likely to compete by giving away perks such as free wireless Internet and spa packages.

Weaker demand as supply grows

Fact is, demand for hotel rooms has been slipping for the last three years. That was fine as long as supply didn't overwhelm the market. Indeed, hoteliers have been able to raise room rates substantially every year since 2003, when the tourism market recovered from the terrorist attacks of 9/11.

But now, the supply of new hotel rooms is growing even as talk of an economic downturn grows. For example, developers plan to deliver more than 5,000 new hotel rooms in the Tampa area in 2008, says Tony DeGeorge, president of Greene Canfield DeGeorge, hotel brokers based in Clearwater.

DeGeorge says the market may be getting oversaturated with hotel rooms. "We're getting close," he says.

Because it takes years to obtain the necessary permits to build a hotel, many developers started these projects while the real estate boom was in full swing. "A lot of people looked at that area and said there's obviously money to be made," Freitag says. "There's a lot of rate growth and that gets developers interested."

For example, the average daily room rate in the Fort Myers area grew 11.2% to $133.70 for the year ending in November 2007 versus the same period last year, according to Smith Travel Research. Other Gulf Coast areas also have seen rate strength the Tampa Bay region was up 6.2%, Sarasota-Brandenton area rose 6.8% and Naples grew 7.9%.

Now, just as new hotels are coming to market, the situation is changing. "Suddenly, the demand numbers aren't quite so strong as they were," Freitag says. "Spending is slowing down a little bit."

The Sarasota-Bradenton area saw the biggest drop in demand along the Gulf Coast last year, an 8% decline. Memory of hurricanes is still fresh and group business bookings in the fall were down as a result, says Virginia Haley, president of the Sarasota Convention and Visitors Bureau.

Demand was particularly weak in the southern areas of Sarasota, where hotels were struggling to fill rooms because of the residential real estate decline. Many of these hotels housed workers, investors and other people scouting the area for real estate opportunities during the boom.

Even in Naples, where the $186 average daily room rate is by far the highest on the Gulf Coast, hoteliers are fretting about dropping demand. "It's related to the economy," says Clark Hill, the general manager of the Hilton in Naples.

Naples is often perceived as impervious to the fluctuations in the broader economy because of its wealthy and international clientele. But the numbers of individual business travelers and instate vacationers have declined because of the residential real estate downturn. "So much is related to that industry," Hill says.

For the last several years, Naples hoteliers have been able to boost room rates to the highest on the Gulf Coast because of limited new supply. High land costs, lengthy permitting, high taxes on new construction and the scarcity of well-located sites kept new development in Collier County at bay and there hasn't been any additional supply of rooms since 2001, according to Smith Travel data. But supply is returning to Naples after five straight years of declines. For example, there's word a new Embassy Suites is going to be built on U.S. 41 in Naples this year.

In Fort Myers, a mini boom of hotels is underway around Southwest Florida International Airport and Florida Gulf Coast University just off Interstate 75. A 175-room Sheraton has been proposed on airport land, for example. Owners of existing hotels in Fort Myers grumble that too much supply is flooding the area around I-75.

But beachfront properties are still holding their own. "Upscale properties are holding occupancies quite well," says Tony Lapi, president and CEO of 'Tween Waters Inn on Captiva Island. Most beach hotels cater to leisure travelers who booked in advance and are unlikely to change their travel plans. What's more, these leisure travelers are wealthier and can weather an economic downturn without eliminating their vacation plans.

By contrast, corporate customers have no qualms canceling travel if their business suffers. Still, there's no evidence that's happening in Lee County or other areas of the Gulf Coast.

Outlook for jolly old Florida

Florida's hospitality industry is banking on Brits and Germans to offset whatever softness there's likely to be in hotel business this year. The memory of hurricanes is finally starting to fade across the Atlantic. "We've had to fight that hurricane season for a couple years," Lapi says.

Now, Europeans are starting to return to Florida after an extended absence that followed the terrorism attacks of 9/11 and the bad storms. It helps that the euro's purchasing power in dollar terms has risen substantially.

It's hard to track visitors locally except anecdotally. "We hear them speaking German around the pool," says Hill. However, he's not sure whether European business will offset a decline in domestic travel.

Lapi, who is also the board treasurer of Visit Florida, the state's tourism arm, says Florida is actively courting Europeans. There's also a push to establish a national tax on foreign visitors and use the proceeds to market the U.S. overseas. Lapi says a $100 million national campaign could translate into $8 billion in added revenues from international tourists.

For now, domestic travel seems to be slowing somewhat and airport traffic may not be as robust this season as it was last year. Although one month of data isn't definitive, the three major airports on the Gulf Coast reported lower monthly passenger traffic in November than in the same month a year ago.

Florida is facing competition from cruise ships and resorts in the Caribbean that are rebuilding after a string of hurricanes hit the islands in the last few years, says Teri Lamaine, regional director with Guest Services, a property management company in Bonita Springs.

Tampa, with its combination of business and leisure travel, may be better insulated because the area's more diversified. Leisure travel dominates Southwest Florida.

On the leisure side, there's evidence consumers are shopping more aggressively. "It will be interesting to see if the research bears this out, but anecdotally there is some concern people are looking for lower rates," says Haley.

Still, hoteliers cheered the early arrival of winter in the northern U.S. "Christmas was good for us because that holiday was spread out over a two-week period," Haley says.

The success of 2008 may be determined this summer, especially for properties closer to the beach. That's because summer traffic - traditionally a slow time - can boost profitability if it comes on the heels of a good spring season. "Before, it was a question of how much are you going to lose over the summer," Lapi says.

On the corporate-travel side, businesses still need to send employees to Florida. "All I've heard anecdotally is business travel is going to continue to be strong in 2008 because we have a lot to do," Freitag says. "That's a good sign for the upper and middle class of hotels."

Pat Moran, president of Pat Mar Properties in Tampa, says business travel at his four hotels will meet expectations. "The higher end of the market is doing better than the lower end," he says.

(Dave Szymanski contributed.)

BY THE NUMBERS

GULF COAST

HOTEL SNAPSHOT

Hotels along the Gulf Coast have seen occupancies drop in the last three years. But revenue per available room (revpar), an important measure of the financial health of the lodging industry, has increased in every area except Sarasota-Bradenton in 2007. One reason for this is that limited supply of new hotel rooms has driven up rates and pushed down occupancies. But observers say new rooms under construction will likely put pressure on revenues.

Tampa-St Petersburg change

Year Occupancy Revpar* in revpar

2005 66.5% $59.59 11.2%

2006 64.8% $63.39 6.4%

2007** 62.8% $65.56 1.3%

Sarasota-Bradenton change

Year Occupancy Revpar* in revpar

2005 69.1% $68.63 6.1%

2006 66.4% $73.17 6.6%

2007** 61.6% $72.85 ‑2.4%

Fort Myers change

Year Occupancy Revpar* in revpar

2005 67.3% $71.51 ‑3.6%

2006 63% $75.18 5.1%

2007** 59.6% $79.64 4%

Naples change

Year Occupancy Revpar* in revpar

2005 65% $105.73 5.5%

2006 64.8% $111.25 5.2%

2007** 66% $122.48 8.6%

*Revenue per available room; **2007 figures are year-to-date through November and revpar comparisons are annual with the same period in 2006. Source: Smith Travel Research.

REVIEW SUMMARY

Industry. Hotels

Trend. Demand is sagging as supply increases.

Key. A room-rate price war isn't on the horizon yet.