I had a similar thing happen to me a few years ago, Id booked a central hotel in amsterdam and the travel company rang a few days later and said it had been double booked. (not sure which company it was)
They offered me a hotel on the outskirts of the city which i'd actually stayed at the year before but it was a 30 min bus ride into the city centre and we ended up spending a fortune on taxis.
I had a few cross phone calls, with them refusing to refund me because they had offered a hotel of a higher star, 3 when i'd booked 2 and it says in their terms and conditions they can do this blah blah...
I explained that the reason i'd booked this hotel was for its location and the one they were offering wasn't suitable but they were having none of it.
I worked in a nursery at the time and one of the parents was a solicitor, I asked his advice and he very kindly said he would write a letter free of charge on my behalf if they wouldn't refund or offer a hotel in a central location.
I rang the company and told them I had been speaking to a solicitor and if they didn't refund or offer a cental hotel I was taking legal action, they couldn't refunded me straight away.
In your case they are offering you a lower star accommodation surely they can't do that?
What do your terms and conditions say.
Perhaps phone them and say what I said, its worth a try.