In the hotel world, 2006 will go down as the year for records in many ways. But there are not only reasons for rejoicing… Yet, after several years of crises and moroseness, hotel operations are now seeing indicators return to an uptrend marked by double-digit growth.The consequences of terrorist attacks and meteorological and world health catastrophes are but a distant memory. And so much the better. But upon closer examination, above all, this movement was concentrated in the upscale segment and very large cities, the first to benefit from the economic recovery and renewed business travel. The “new fortunes” that rise out of the new economic giants have appetites for luxury that sustain the vigor of the hotel market.
In light of these results, in an already speculative real estate market, investors are ready to put down considerable sums of money to grow their hotel portfolios. While it is easy to understand a proprietary approach as far as concerns the jewels that will continue to appreciate in value, one might wonder about the contagion’s influence when it also affects properties in economy categories. These may now be negotiated for twice as much as just a few years ago whereas their operating results remain very stable.
The new owners will have demands concerning profitability that will be problematic for hotel operators. Over a long period, rates at economy hotels followed the evolution in buying power of their clients to avoid hurting the dynamic of demand. What will happen now if investors demand a spectacular increase in the gross margin? How can an increase in rates be justified without any real improvement of the product? Will this be the new mission of marketing, rather than to defend the brand’s values and the good value for price ratio of the offer? The model, which works in the upscale today, will meet its limits quickly in the economy segment. The client risks rejecting prices that have nothing to do with reality. It is vital that hotel operators regain control before today’s real estate euphoria becomes tomorrow’s horror.
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