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business newsReal or Ridiculous? The Hotel Occupancy Rate
It's a coincidence indicator of the economy, but is easier to watch than the GDP.
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History tells us that travel expenses are some of the first to be cut, whether for business or for pleasure. This is one of the major reasons that investors and economists alike keep their eye on the Hotel Occupancy Rate, which measures the amount of rooms sold during a given time period compared to the amount of rooms that were actually available at the same time.
The Hotel Occupancy Rate is a coincidence indicator of the economy, meaning it won’t show you when the next downturn is about to happen and will probably take a little longer to recover than the actual economy does. (The first thing to go is typically the last to return.) So what good is it? Well, the rate comes out weekly and is a pretty good indication of where the economy is at a given time. The frequency at which the rate is calculated is easier to watch than say the GDP, which only comes out quarterly.
Occupancy also can be broken out by region. George Washington University economy professor, Tara Sinclair, tells Minyanville that this is a great way to see what areas of the country are hurting the most and which have yet to be seriously affected in an economic downturn. “The economic cycle doesn’t hit the whole country in exactly the same way,” she adds. “The hotel occupancy rate is one of the ways that we can separate out the impact on different regions.”
Yet, the hotel occupancy rate is all about supply and demand; so it can be deceiving. Jan Freitag, a VP at Smith Travel Research -- a company that calculates the Hotel Occupancy Rate -- says that the number is easily masked during years that the supply rapidly outpaces the demand. According to Smith Travel Research, the Hotel Occupancy Rate decreased 9.1% in the first 11 months of 2009 (compared to a decrease of only 4.2% from Jan. to Nov. 2008.) Freitag said the number was not only impacted by a slowdown in travel, but also by the huge number of rooms that were added to the market during the year as construction projects that were started during the boom finally came to fruition.
In other words, the Hotel Occupancy Rate indicator wasn't that useful as it related the current crisis. The decrease in rates would have been much sharper if hotels hadn't been so busy finishing projects started when times were flush.
To be safe, Freitag recommends investors look at RevPAR, or revenue per available room, as well as occupancy. This will give investors a better idea of whether rates are actually increasing along with occupancy and thus whether the health of the industry is actually improving, or if the rates are going down and causing occupancy to increase as people rush for the cheap rooms. RevPAR decreased a whopping 17.3% in the first 11 months of 2009 as hotel chains lowered prices. This tops the 1.3% decline in revenue per available room that occurred from Jan. to Nov. 2008.
In fact, it may be a while before the occupancy rate alone can be taken as an accurate gauge of the economy: More then 100 new properties are still due to open across the country in 2010, according to the New York Times. New York will have the most new hotels, 46, followed by Houston with 30, according to a hotel research company cited by the Times. Hotel experts say that the projects have been in the works for several years, and that finishing existing projects is often less expensive than abandoning them, even in a soft market.
New York City's hotel launches will represent almost all the major chains: Marriott (MAR) will open five hotels in the city under the Courtyard and Fairfield Inn brands; InterContinental (IHG) and Hyatt (H) will each open four hotels under various brands, and Starwood (HOT) reportedly has plans to open six hotels under the Sheraton, Four Points by Sheraton, Aloft, W, and Element banners.
Projections for recovery of the American hotel industry itself are all over the map. Although many believe it will be a sluggish year, Steven Kent, lodging analyst for Goldman Sachs, told the New York Times that he predicted “corporate and leisure travel will outpace the broader economy” this year, and RevPAR at all North American hotels would rise 4% to 5%, with occupancy increases responsible for most of that gain.
Let's hope the economy will follow.
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