Economic Woes Could Bring Cheaper Rooms

MTThe Ritz-Carlton on Tverskaya Ulitsa, one of the city's priciest hotels, where rooms start at over $700 per night.
David Lang flies to Moscow from the southern Siberian city of Chelyabinsk about a dozen times a year to attend real estate conferences and meetings.

Although he has not cut back on trips, the financial crisis has forced Lang, head of the Zapadny Bereg real estate development firm, to cut short the number of days he stays in the city.

"If you're only going to have two days in Moscow, you have four meetings a day instead of two. The mantra now seems to be more business, less lunch," said Lang, a tall, jovial New Yorker with slicked-back hair and a small ponytail.

As the impact of the world financial crisis ripples through the country's industries, companies Ч both small businesses like Lang's as well as with major corporations Ч are slashing their travel budgets, forcing Moscow's hotels, which depend on business travelers, to tighten their belts as well. Some experts see a silver-lining, however, as hoteliers could be forced to consider providing travelers with more affordable alternatives.

"We have been reviewing our business plan for 2009, and we are preparing," said Maria Losyukova, a spokeswoman for the Ararat Park Hyatt Moscow. "We haven't been affected by the crisis yet, but if things keep going the way they are then we could have some problems in the future."

Losyukova said businesses are sending fewer people to stay at the Hyatt but added that occupancy was still high.

Despite the growing financial crisis, the prices of the city's hotel rooms have been trending upward.

The average cost of a three-star room rose more than 30 percent from 2007 to 2008, while the cost of a four-star room increased by 15 percent and prices on five-star rooms increased more than 10 percent, Knight Frank said in a third-quarter report.

One factor driving prices up is a dearth of quality midrange hotels, said experts interviewed for this report.

Currently, there are about 45,000 to 50,000 rooms in Moscow, said Semyon Fomin, a real estate analyst at Troika Dialog.

Fomin said about a quarter of the city's 50,000 hotel rooms are in the high-end segment, while only about 10,000 are in midrange, internationally branded hotels.

The remaining 25,000 to 30,000 rooms, he said, are "unlivable."

The midrange rooms that are available are drastically overpriced, said Stanislav Ivashkevich, an associate director of hospitality development at CB Richard Ellis.

Vladimir Filonov / MT
At the Aerostar Hotel on Leningradsky Prospekt, rooms start at $300 a night.

While a five-star room could cost as much as $700 per night, a night at a "midrange" hotel could cost as much as $350, he said.

"This is like trying to sell a Toyota Corolla for the price of a Mercedes S-Class," he said.

Although Mayor Yury Luzhkov has made the development of three-star hotels a priority, "so far there has been little movement in this sector," said Fomin.

The Tourism Committee of Moscow announced last year that 30 new hotels are to be built in Moscow by 2010, most of them three-star, business-traveler-class hotels.

The committee was unavailable for comment after repeated phone calls.

Travelers seeking cheaper accommodations in the wake of the financial crisis could spur a growth of affordable hotel rooms, Fomin said.

"With people spending less money on high-end hotels, we can expect more two- and three-star accommodations to be built."

As a contrast to Moscow, analysts point to the regions, where a combination of less expensive real estate and proactive local authorities are expected to take the edge off of a potential downturn.

"The regions won't feel the hit. There will be a correction, but it will not be as big as the one that will hit Moscow," said Fomin.

His feelings were echoed by other analysts.

"The situation in the regions is much better than in Moscow. The local authorities really understand the benefits and are trying to help open hotels in their cities," Ivashkevich said.

In Moscow, however, high real estate prices are a major factor contributing to slow growth in the number of hotels, as well as to the sometimes astronomical costs of hotel rooms, analysts said.

Ironically, the financial crisis could induce a drop in property prices, allowing for a greater number of lower-end hotels to be built, experts said. This, in turn, could open up a segment of the market that many international chains have yet to attract Ч business travelers from the Russian regions and the CIS.

Joel Goldman, the director of Cushman Wakefield hospitality, said 75 percent to 80 percent of visitors are from Russia and the CIS, "and they're not staying in foreign hotels at all."

"If there is an adjustment in the real estate prices in Moscow, it may well open up the greatest prize, which will be to cater to that 75 [percent] to 80 percent of the market [business travelers from around Russia and the CIS]. The under-$250-a-night market is an extraordinary one," said Goldman.

"The Moscow hotel market is a very young and unstable one. But it will certainly reach maturity within the present cycle by 2012 or 2013," he said.