Hospitality Q&A: Perkins Coie’s Phil Gordon Says Room Buyers Have ‘Whip Hand’
- Sep 09, 2008
September is the time when hotels negotiate rates with its corporate customers for the upcoming year, but hotel owners may feel a chill in the air that has nothing to do with a change in the weather.Business travelers typically pay higher room rates, spend more money at the hotel, and are a more dependable revenue base than leisure travelers. But, because of the economic downturn, corporations will likely spend less on business travel this year, and hotel owners will not be in a favorable bargaining position, because of lower occupancy and falling revenues.Phil Gordon, a partner in the hotel and leisure practice at Perkins Coie L.L.P., specializes in negotiating financing deals for hotels in the U.S. and globally, and has supervised the acquisition, financing, and management agreement negotiations of approximately 50 hotels in the U.S. and Europe.Gordon talked recently about how hoteliers should fare during this year’s corporate rate negotiation season, and other issues hotel owners and developers will likely face. CPNHospitality: How do you see the hotel industry faring during the corporate negotiation season?A.) The hotel industry performs as well as the GDP performs, because growth means there is more business and leisure travel. One problem is that airline flights are down. Hotels in the Caribbean will also be challenged by the cutback in flights, as airlift is crucial to them. I see buyers [of rooms] having the whip hand in negotiating rates. Everything is market driven. Some markets, such as New York, haven’t seen a lot of hotel room supply added. But other markets do have some supply issues. Las Vegas is one city that should face that. CPNHospitality: What is your overall outlook for the industry, and what challenges and opportunities are out there?Gordon: We’ve seen a downturn in the business cycle, and an uptick in inflation. I think we will see a lot of hotels coming on to the market, because they have debt that can’t be refinanced.The positive is that there is now a chill on supply being added. Luxury hotels have been built as part of residential developments in recent years, and the residential part has subsidized the hotel part of the development. Those subsidies have now evaporated. If a hotel owner can hold on to the hotel, and keep up the property, that owner should have an advantage during the next up cycle. CPNHospitality: Are there any legal or legislative issues that the industry should be keeping an eye on? Gordon: Nothing terribly specific. State legislatures are more focused on reducing the carbon footprint of buildings, so that could mean some added expense for hotel owners. A Democratic president is typically friendlier to labor, so labor costs at hotels could go up. Owners are entering a time period that could be called the perfect storm, an environment where there is no financing, higher costs, and lower room rates. However, there is a good amount of equity capital floating around. But I see a challenging couple of years.