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Defense budget cuts could impact hotel demand
May 8 2012

President Obama's proposed defense budget cuts have some hoteliers in military markets scrambling to replace demand.

Highlights
  • President Obama’s $487-billion defense spending cut could negatively impact hotel demand in military markets.
  • In Columbus, Georgia, 55% to 65% of hotel demand comes from the military.
  • As a result of a the 2005 BRAC commission,  the closure of Fort Gillem and Fort McPherson in Georgia in September of 2011 left a void of military demand in southern Atlanta.
By Samantha Worgull
Editorial Assistant
sworgull@hotelnewsnow.com

 

REPORT FROM THE U.S.—President Obama’s proposed defense budget, which would cut $487 billion in military spending during the next decade, has many hoteliers scrambling to bolster demand in military markets.

In Columbus, Georgia, for example, a decrease in enrolled trainees at nearby Fort Benning could negatively impact hotel performance, according to sources.

During the 2011 fiscal year, Fort Benning trained 131,100 soldiers. This fiscal year, which began 1 October 2011 and ends 30 September 2012, the fort will train only 96,000 soldiers, according to a 19 January article in the Ledger-Enquirer.

 

Heidi Nielsen, senior project manager at the HVS Atlanta office

In Columbus, 55% to 65% of hotel demand is based on military demand, according to Heidi Nielsen, senior project manager at the HVS Atlanta office.

 

Most of that demand comes from training, graduation ceremonies and contract jobs—drivers that Marian Goodman, CEO of Sky Hospitality, which manages a Microtel Inn & Suites near Fort Benning, fears might disappear slowly with the decrease in trainees.

In addition to the exodus of 35,000 troops, Fort Benning Army Lodge, a hotel facility comprising 860 rooms, will open on the base this year. Peter Bowden, president of the Columbus Convention & Visitors Bureau, said the facility will not adversely impact surrounding hotels, but area hoteliers are not so sure.

Goodman said additional supply will definitely hurt demand, especially with performance numbers already lagging.

“We started seeing the effects last fall, and we hadn’t really been informed about the situation until January,” she said. “Occupancy has dropped off, but the rate is stronger because it’s not the same type of business.”

Demand in Columbus year to date through March was down 13.1%, according to STR, parent company of HotelNewsNow.com.

Elsewhere throughout the country, hotel performance metrics in other military markets are generally flat or negative. (See chart.)
 
Per-diem effects
With a substantial amount of hotel demand coming from the federal government,
average rates at hotels in military markets also could be affected by the loss of military personnel who are booking rooms at per-diem rates.

Nielsen said a lot of hotel markets are dependent on the per diem they see from military personnel to set rates.

In Charleston, South Carolina, home to Joint Base Charleston, for example, the per-diem allowance is $136. But prior to 2008, it was just $92. When the rates were lower, military personnel predominantly used midscale hotels. Now that rates have jumped almost 50% since 2007, the demand has shifted to upper-midscale and upscale chains.

“It’s unfortunate for the economy hotels that used to get that business,” Nielsen said.

Not only do per-diem rates affect demand for hotels, but they also affect development plans.

“They’re not going to build an economy hotel in a market where the per diem is at $82,” Nielsen said. “There's going to be more focus on midscale and upper midscale hotels because they can get a higher rate there.”

Extended-stay hotels are also a popular choice due to the demand coming from members of the military reserves, she added.

BRAC effects
This is not the first time demand from military personnel has decreased. More than a decade ago, the United States government passed the Defense Base Realignment and Closure Act of 1990 in an effort to re-organize the country’s widespread network of military complexes.

The government has conducted five rounds of base closures since implementing the program, the most recent of which led to the closure of Georgia’s Fort Gillem and Fort McPherson in September 2011, which left a void of military demand in southern Atlanta.

“I’m losing my people that used to come every two weeks for training and stuff like that,” said Jack Patel, hotel manager at the Rodeway Inn in Forest Park, which is two blocks from Fort Gillem. “I’ve seen a 30% to 35% decrease in business.”

Unfortunately, some markets like Forest Park do not have the luxury of additional demand drivers.  

In Sumter, South Carolina, for example, which is home to Shaw Air Force Base, 70% to 80% of the market’s demand comes from the military, Nielsen said. “If the base shut down, the hotels would have nothing,” she said.

Hotels located near bases in major cities—like Fort Benning in Columbus, Georgia—do not live and die by military demand though, Sky Hospitality’s Goodman said.

Outside of that base-generated demand, Columbus draws demand from companies such as Aflac, which is headquartered in the city, and Boeing, which works with more than 400 businesses and employs nearly 700 workers in the state.

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