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About six weeks after financial markets collapsed on news of the downfall of American International Group Inc., Lehman Bros. Holdings Inc. and Merrill Lynch & Co. Inc. and analysts’ predictions of an economic recession, hotels in Greater Des Moines experienced a double-digit drop in occupancy and room rates. The average hotel was more than half empty in December and the average daily rate was down more than 10 percent, after occupancy rates had risen 9.3 percent to 67.6 percent in July from the prior-year period.

Despite a boost from the Iowa caucuses in late 2007 and early 2008, hotel managers blame the major change in last November and December’s occupancy and average daily rate levels on the economic downturn, which has especially affected corporate travel. They compare it to a similar downturn after the Sept. 11, 2001, terrorist attacks. And although conditions are starting to improve, they believe it could take most of 2009 to fully recover.

“When you go from one of the best months we’ve ever had across the board in general with restaurants and hotels to 90 days later, one of the worst months I’ve ever seen, what does that tell you?” asked Mike Whalen, president and CEO of Heart of America Restaurant & Inns, which owns six hotels in Greater Des Moines.

“We saw a lot of corporate travel just stop in November and December,” said Paul Rottenberg, president of Orchestrate Management, which manages Hilton Garden Inn Des Moines/Urbandale in Johnston, the Holiday Inn Express Hotel & Suites in Altoona and the Hotel Fort Des Moines downtown. “The news that the economy got worse and news that the recession reached Iowa in October, it was almost like clockwork that Iowa companies the last two months of the year stopped traveling, but now we’re starting to see meetings book again.”

Occupancy down

Occupancy for all of 2008 was down 4.4 percent to 58.1 percent, according to preliminary figures for the area from the Smith Travel Report. Even with the caucuses in January, occupancy was 48 percent and rose steadily until a peak in June at 75 percent. Though occupancy was down to 67.6 percent in July, it remained 9.3 percent above the 2007 level. The trend continued with a 5.1 percent increase in occupancy in August compared with August 2007, and then rates plummeted 17 percent in November and 18.5 percent in December compared with the 2007 periods. By the end of the year, the occupancy level was 40.5 percent.

From 2007 to 2008, the area’s overall room count rose 5.7 percent.

Gene Caleb, president of R.J. Conley Hotel Group, which owns The Holiday Inn Downtown and the Holiday Inn Express Des Moines/Drake University, said occupancy levels at his hotels were up last year, but are expected to be flat or slightly lower this year. Being in a mid-priced market with the Holiday Inn brand and with locations close to Mercy Medical Center and Drake University has helped, he said.

Rottenberg said his hotels’ occupancy rates mirrored the market average and though he saw a slight rebound in January, occupancies are “not rebounding to traditional levels.” He expects occupancy the next several months to remain below the average.

Meanwhile, Terry McLane, general manager of the Des Moines Marriott Downtown, said that in November and the first half of December, his hotel was beating the market average. January also was strong, thanks to a solid base of group business from winter conferences, especially in the agricultural sector.

He also doesn’t see as much of a downturn in business travel but that “people are traveling less and staying longer.” He also said the Marriott’s numbers are skewed slightly because 68 of its rooms are undergoing renovations, so they are not counted in the occupancy figures.

Whalen said the slump continued in January, but looking out 90 days, business seems to be picking up again.

The downturn especially affected Heart of America’s Holiday Inn Hotel and Suites, which opened in West Des Moines this year. “Our restaurant side out there, particularly during the holidays, blew the doors off the place,” Whalen said, “Room occupancy was less than we projected. Now is not the time to build a hotel in Des Moines.”

Rate competition

The average daily room rate in Greater Des Moines rose 3.3 percent last year to $82.82, much less than the 7 percent rate increase in 2006 and 6.3 percent increase in 2007. Though the increase helped offset a decline in occupancy – with the average revenue per available room falling only 1.3 percent last year – hotel managers are predicting that rates will have to hold steady or decrease this year to keep occupancy levels up.

“Our industry in the last four years, it was relatively easy to increase room rates, but that has come to a screeching halt now,” Caleb said. “You’ll probably see some erosion in rate per rooms. … You’re going to have to price the product more competitively in order to garner business.”

Rottenberg said that because the Internet has made room rates more transparent, if one hotel drops its rates, others are likely to follow, creating a competition that won’t benefit the industry. His hope is that the major hotel owners in Des Moines will maintain their rates through this difficult time.

“Des Moines is already very competitively priced, and there’s just no reason for us to let our rates drop,” he said.

McLane confirmed that the Marriott has for the most part held its room rates steady, but has had more leisure travel discounts.

Hard sell

Rottenberg’s strategy is to take a sales staff that traditionally concentrated on selling specific properties and combine them into one division that will now sell not only the hotels Orchestrate manages, but also Gateway Market, Centro and other properties. Last week, the staff went on a bus tour of all the Orchestrate properties, and Rottenberg expects the change to be effective by the end of the month.

“It would be easy for hotels to pull the blanket over their heads and say, ‘There’s nothing we can do,’ or get out and knock on doors and tell people how wonderful our properties are and see if we can change our fortunes,” he said.

Caleb and Whalen both said their hotels are stepping up sales efforts as well, in addition to searching for ways to cut costs. Heart of America looked at every expenditure in “a way we haven’t looked at it in quite a long time,” Whalen said, including magazine subscriptions and Internet connection.

This type of scrutiny could lead to a reversal in the amenity war hotels were involved in over the past few years, racing to add new features such as plush bedding, specialty soaps and wireless Internet access.

“We haven’t reduced amenities yet,” Caleb said, “but we are constantly looking at where we can operate more efficiently.” His hotels recently went through a bedding upgrade that cost about $1,200 per room and included nicer sheets, four or five pillows and a duvet cover.

McLane said the rush to add amenities has slowed down at his hotel as well. “I think as the rates have held steady, we’ve also maintained our amenities for the most part, but we’re not rushing to give everyone more. We need to count our pennies.”

Luckily, Rottenberg said, many of the changes to his hotels, including all-new bedding at the Hilton Garden Inn, happened before the recession. “I think you’ll see brands pull back a little bit on that and some programs slow down,” he said. “They are sensitive to people not making as much as before.”

Still, his group is moving forward on plans to renovate the Hotel Fort Des Moines, and expects to announce more definitive ideas and franchising options in the next couple of months.

This may go along with the thinking that the recession is only a part of a cycle that happens in the industry every decade or so.

“We also saw this in 9/11,” Whalen said. “People said, ‘Oh my gosh,’ and quit traveling, and then at some point, people woke up and said, ‘We’ve got to get out there and sell stuff,’ and so it kicked back up.”