Please ensure Javascript is enabled for purposes of website accessibility

The Hotel Conundrum

  • By
  • | 6:00 p.m. May 11, 2007
  • | 2 Free Articles Remaining!
  • Entrepreneurs
  • Share

The Hotel Conundrum

TOURISM by Jean Gruss | Editor/Lee-Collier

Guests at hotels along Florida's Gulf Coast have been paying more for lodging but occupancy rates have declined. How long can this last?

These are good times for the hotel business along Florida's Gulf Coast.

Average daily room rates rose substantially last year, with Fort Myers leading the way with an 11.8% jump in 2006 versus 2005, according to Smith Travel Research, a hospitality consulting firm based in Tennessee.

When looking at revenue per available room, another way the industry evaluates lodging income, the spikes have been equally impressive, led by the Tampa Bay area's 6.3% increase.

But occupancy rates, another measure of the hotel industry's health, show worrisome signs. Occupancy rates declined in every major market along Florida's Gulf Coast in 2006. Fort Myers, the area that saw the biggest increase in average daily room rates last year, also witnessed the greatest decline in occupancies, down 5.1%.

Generally, occupancies and rates move in sync. Higher occupancies lead to higher rates while the reverse is true. Along the Gulf Coast of Florida, the two are diverging.

Dan Peek, managing director of Regent Street, a hospitality investment advisory firm in Tampa, is fond of quoting hotelier Bill Marriott. "ADRs (average daily room rates) are what you put in the bank," he says. "You can't put occupancies in the bank."

In most cases, hoteliers are willing to sacrifice some occupancy in exchange for higher rates. That's because it's more efficient to run a hotel with fewer rooms but higher-paying guests.

But keeping that balance can be tricky because hoteliers don't want to scare customers away with rates that are too high relative to other locales. "We think Florida in general has had trouble because there's so much competition for the same number of visitors," says Jack Wert, executive director of the Naples, Marco Island, Everglades Convention & Visitors Bureau.

Hoteliers and tourism promoters say some of the occupancy decline is because more hotels have been built or renovated recently. Generally, new hotels take more time to fill up. Other reasons include a reduction of moderately priced rooms and difficult comparisons with the hurricane season of 2005.

Looking ahead, developers lured by healthy rate increases are preparing to build new hotels. In Tampa alone, Smith Travel Research says it knows of 78 projects in the pipeline.

Now, the question is whether the building cycle will be excessive and swamp the market with hotel rooms that can't be filled. "The increase in supply is coming to bear," warns Jan Freitag, vice president of global development with Smith Travel Research.

A healthy market

For now, hoteliers are happy to take rising rates in exchange for moderate declines in occupancy rates. "At the end of the day, I don't believe the owner worries as much about occupancy than revenue," says Steve Hayes, executive vice president of the Tampa Bay Convention & Visitors Bureau.

That sentiment is echoed down the coast. "I would rather see that than our industry buy occupancy" by lowering rates, says Virginia Haley, president of the Sarasota Convention & Visitors Bureau.

In Fort Myers, the jump in rates has been tied to the reopening of the South Seas Resort on Captiva island, whose 465 rooms underwent $140 million refurbishment after Hurricane Charley's devastation in 2004. "Hotels are happy to have higher rates and fewer people," says Nancy Hamilton, communications director for the Lee County Visitor & Convention Bureau.

In some cases, occupancies declined because hotels filled up with local residents during the 2005 hurricane season. That makes comparing 2006 occupancies to 2005 more difficult.

In other markets, such as Clearwater Beach, moderately priced hotels have been torn down to make way for pricey resorts. "Part of our challenge is that we have lost 4,000 moderately priced hotel rooms in the last couple of years," says Lee Daniel, assistant director of the St. Petersburg/Clearwater Area Convention and Visitors Bureau.

Markets such as Clearwater are attracting more upscale visitors than before. The median household income of visitors to Clearwater in February rose from $98,420 in 2006 to $113,871 in 2007, a 16% increase. Hotels such as the Renaissance Vinoy and the Don CeSar are responding to the demands of an upscale clientele by building large spas.

In Naples, demand is just now catching up with the supply of hotel rooms. "For a while we were overbuilt and we're seeing just now that surplus being used up," says Wert.

Naples' room rates are the highest on the coast, with average daily rates hitting $169.85 in 2006. In March, the average room in Naples cost $274.85 per night, up 10.5% over the same month last year, according to Smith Travel Research.

The supply of rooms in Naples fell 3.1% in 2006 versus the prior year, likely contributing to the rate increases. But Wert cautions that several large hotels such as the Marco Island Marriott and the Naples Grande were undergoing renovations last year and are now back on the market.

In the Tampa market, the supply of rooms increased just 0.7% in 2006 versus the prior year. Although demand slipped 1.6%, average rates rose 8.7%. That's in line with the rise of 7% and 8% statewide, says Peek.

Supply forecast to rise

The rising rates on the Gulf Coast haven't escaped the eyes of developers. In recent years, many hotel developers turned instead to building condos. Faced with a glut of condos, developers are returning to hotels.

In Sarasota, for example, 1,500 new hotel rooms are planned in a market that only has 5,000 rooms, says Haley. "We're poised for a significant increase in our inventory," she says. "There are a dozen projects that have been publicly discussed in varying degrees."

But the hotels that are coming out of the ground aren't resort-style, with the exception of full-service luxury properties such as Sandpearl on Clearwater Beach. Instead, they're hotels with more limited service such as Hampton Inn, Hilton Garden Inn and Courtyard by Marriott and they're mushrooming around interstate exits and near corporate parks. "It's relatively affordable to build and it's popular," says Peek.

For now, most observers don't see overbuilding despite the fact that capital is widely available. "It'll be interesting to see how that will play out," says Peek. For now, he says, "we don't see a massive increase in supply. Other than availability of capital, we don't see undue stimulus."

In some areas such as Naples, the cost and availability of land is keeping developers away. Unlike communities to his north, Wert says he hasn't spoken with any developers about building a new hotel in Naples. "There's not a lot of appetite on the lending side," he says.


Industry. Hotels

Trend. Rising rates and declining occupancies

Key. Overbuilding of new hotels risks pushing rates back down.


Hotel Conundrum

Hotel occupancies declined in 2006 even as rates increased. On average, Sarasota hotels had the highest occupancy rates on the Gulf Coast while Naples posted the highest rates.

Tampa-St. Petersburg

Year Occupancy rate (%) Avg. daily rate Revenue/Available Room

2001 62.2% $84.86 $52.75

2002 60.1% $80.19 $48.17

2003 60.7% $79.92 $48.54

2004 65.7% $82.03 $53.88

2005 66.5% $89.68 $59.60

2006 65.0% $97.49 $63.33


Year Occupancy rate (%) Avg. daily rate Revenue/Available Room

2001 62.6% $79.34 $49.63

2002 58.6% $81.77 $47.89

2003 60.4% $83.46 $50.37

2004 72.7% $89.09 $64.73

2005 69.1% $99.41 $68.69

2006 66.6% $108.70 $72.37

Fort Myers

Year Occupancy rate (%) Avg. daily rate Revenue/Available Room

2001 59.4% $117.51 $69.85

2002 56.3% $111.67 $62.88

2003 58.6% $112.05 $65.66

2004 68.9% $107.68 $74.19

2005 67.3% $106.23 $71.52

2006 63.9% $118.80 $75.87


Year Occupancy rate (%) Avg. daily rate Revenue/Available Room

2001 60.9% $148.74 $90.51

2002 57.0% $143.49 $81.85

2003 58.8% $146.95 $86.38

2004 67.1% $149.25 $100.14

2005 65.0% $162.28 $105.49

2006 64.8% $169.85 $110.11

Source: Smith Travel Research


Latest News


Special Offer: Only $1 Per Week For 1 Year!

Your free article limit has been reached this month.
Subscribe now for unlimited digital access to our award-winning business news.
Join thousands of executives who rely on us for insights spanning Tampa Bay to Naples.