Natural Occupancy Rates and Development Gaps

Abstract

An analysis of hotel demand using a calculation of "natural occupancy rates" can show whether a particular market's supply may be overreaching demand. Using 11 years of occupancy data from Smith Travel Research, the analysis found a natural occupancy rate of 62.9 percent for U.S. hotels as a group. The analysis further found that specific U.S. markets (metropolitan statistical areas, or MSAs) with steeply seasonal occupancy had a lower natural occupancy rate than those with relatively steady month-to-month demand. Additionally, a market with relatively low ADRs has a higher natural occupancy rate than a market where high ADRs give operators strong revenues from relatively few occupied rooms. The value of analyzing natural occupancy rates is to gain an assessment of the gap between demand and supply in a given market-both in the short term and over the long term. Examining 24 individual U.S. MSAs, the analysis found that additional supply is justified in virtually all of those markets-albeit in small amounts for some. The analysis also shows that it is easy to misread the market's short-run need for additional rooms and thereby overbuild markets.