Hotel valuation experts have developed a method
to determine market demand in a local market
that can be used for EB-5 financing.
Hotel consultants such as PKF and HVS have developed standards for determining what they consider the natural optimum
average occupancy rate for each local market, which we will call
the “optimum occupancy rate.” The optimum occupancy rate
refers to the percentage of occupancy that will maximize the
profitability of the hotel, based on the market conditions in that
local market rate. If the average occupancy is 80 percent but the
optimum occupancy rate is 70 percent, hotel consultants conclude that there is a demand for hotel rooms that is not being
met, because more people are staying in existing hotels in the
market than the rate that would allow maximum profitability
for all hotels in the market. This article explains how hotel consultants set the optimum occupancy rate for each local market,
and why an average occupancy rate in excess of the optimum
occupancy rate indicates a demand for additional hotels.
“For new hotel projects that use EB-5
financing, it is necessary to show that
the new hotel is not merely taking
jobs from existing hotels in the area,
but actually creating new jobs.”
Why does the mix of demand make a difference
in setting the optimum occupancy rate?
Hotels will typically be most profitable during the times that
they have the highest occupancy, since they can charge higher
rates during those times. Therefore, one of the keys to maximizing hotel profitability is having enough rooms to serve guest
demand during the peak occupancy periods. If a hotel does not
have enough rooms to meet demand during the peak occupancy
period, it is losing its highest revenue earning nights. When
considering a local hotel market, if all of the local hotels are
full during the peak occupancy periods, then the local market
is effectively turning away guests for lack of rooms, and losing
revenues that could be generated both in the hotel and outside
the hotel at restaurants, shops and attractions. Therefore, the
optimum occupancy rate is set in order to maximize the availability of rooms during the peak seasons, without running at a
loss during the off-peak seasons.
How do hotels maximize revenues during peak periods,
but not lose money during off-peak periods?
Hotels are generally designed to break even on operating
expenses at a 50 percent occupancy rate. Therefore, if a hotel
can operate at a 50 percent occupancy rate during non-peak
periods, and operate at a 75 to 90 percent occupancy rate
during the peak periods, the hotel should be able to optimize
The optimum occupancy rate for a local hotel market
is determined by the mix of demand in that market.
In markets where demand varies substantially based on seasonal factors, such as ski areas, there will be a wide difference
between occupancy rates during the high season versus the
low season. In areas where hotel demand is largely based on
business travel, occupancy rates will be higher on weekdays
than weekends, and the opposite will be true where demand is
based on leisure travel. In areas where there is wide difference
between occupancy rates during high periods and low periods,
the optimum occupancy rate will typically be set at 70 percent.
Where the difference between occupancy rates during high and
low periods is less, the optimum occupancy rate will often be set
at a higher percentage. For example, in San Francisco and Los
Angeles, optimum occupancy rates are typically set at between
72 and 78 percent. In Houston, the optimum occupancy rate
is about 70 percent. In New York City, where hotels are in high
demand virtually all year, the optimum occupancy rate is about
80 percent. In Las Vegas, where gambling and other attractions
seek to fill their venues with guests, the optimum occupancy rate
is about 90 percent. In contrast, the average hotel occupancy rate
in the United States is about 63 percent annually.
How is the optimum occupancy rate
established for each local market?
In preparing a feasibility study for a new hotel, the hotel consultant will begin by compiling data on the existing hotel room
inventory in a given market, using the industry standard data
gathered by Smith Travel Research, Inc. and its international
affiliate, STR Global (collectively, “STR”) to analyze the historical occupancy rates and room rates of the ex