In the hotel business, as in any other, the logical response to a tough economy is to cut prices in order to maintain a steady flow of guests and revenue. Industry experts have their own response to that thought: Don’t do it.

Corporate and convention rate negotiations are currently under way that will set the pace for the room rates charged by owners and operators throughout 2009, which is already perceived as being an off year for hotels. While hotels have had the upper over the last few years, they must now deal with tightening company travel budgets and shrinking conference attendance.

Cutting room rates was the wrong solution when hotel demand fell sharply in the months following Sept. 11, 2001, according to Dan Lesser, senior managing director of the CB Richard Ellis Valuation & Advisory Services Hospitality & Gaming Group in New York City. Although some softening of room rates is anticipated in the coming year, he says it does not have to be as steep as they were seven years ago.

“The industry has much better control of its inventory, particularly with the Internet service providers,” says Lesser, who participated in a Webinar on hotel operations strategies Oct. 22. “The lessons have been clearly learned that cutting rates does not solve all problems.”

Higher rates that were locked in during 2007 should hold up in the year ahead, says Bjorn Hanson, a hospitality and tourism management professor at New York University. He predicts a 3.1% increase this year in average daily rates for the US lodging industry.

Hotels were able to negotiate average corporate rate increases of approximately 5% over last year, varying more or less based on seasonality or food and beverage spending, Hanson says. However, he adds that corporate travel managers might try to recover higher rates paid in prior years by negotiating what some call a “subsidy” in 2009 that will amount to decreases or increases of no more than 2% either way.

“The corporate, contract and convention/group rates negotiated in 2007 and earlier have been a significant factor supporting average daily rates in 2008,” Hanson says. Those rates represent approximately 20% of occupied room nights and almost 30% of US lodging industry revenue, he says.

Hotels will lose their leverage to negotiate higher prices next year because occupancy is expected to fall to 58.3%, the lowest level in the last two decades, says Mark Woodworth, president of Atlanta-based PKF Hospitality Research. He predicts that profit margins will fall a full percentage point to 28.5% in 2009.

“Hotels running at higher performance levels entering the downturn are better positioned to endure the weak periods ahead, but even the most talented of managers will be tested,” Woodworth says. He noted that owners have certain fixed operating costs that need to be covered regardless of the decline in the number of guests.

CBRE’s Lesser suggests that hotel owners attempt to challenge local tax assessments on properties that may have declined in value over the past few years. “Every dollar that is saved through a process like that goes straight to the bottom line,” he says.

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