BOULDER, Colorado—Occupancy index is a basic calculation that speaks to a property’s overall ability to effectively compete for rooms with the properties in its competitive set. If a hotel achieves an occupancy index of 100%, its market share and its fair share are equalized. However, properties that are much larger than their competitors are at a distinct disadvantage in trying to achieve a full occupancy penetration.
A hotel with 150 rooms that has competitors averaging 75 rooms will have to sell twice as many rooms as each of their competitors to achieve the same occupancy. However, this disadvantage is often overlooked, and a property achieving less than a 100% index may be criticized for being less effective in its sales efforts.
But that same property might be, in fact, selling many more rooms than its average competitors, even if it has a lower index. It’s basic math, but a 150-room hotel running 70% occupancy is still selling more rooms than a 75-room hotel running 80% occupancy.
On a per-property basis, the larger hotel in this example is accounting for the most rooms sold in a competitive set, and thus exerts much more competitive influence than a subpar occupancy index would suggest.
This example might be a bit of an extreme. In reality, how many comp sets are out there where the subject property is twice as large as the average of its named competitors? As part of STR Analytics review of 30,000 comp sets (and subsequent U.S. Comp Set Study publication), this is the exact kind of statistic we unearthed.
The average size of a hotel reporting data to STR, the parent company of the Hotel Investment Barometer, is 117 rooms, while the average room count for its competitors is 121. In fact, 59% of U.S. hotels have a comp set with a higher average room count. Overall, however, most properties and their average competitor are fairly close in size to one another.
To illustrate the impact on occupancy index room count differences can make, consider the following:
• The average hotel is roughly the same size as its average competitor, and it achieves an occupancy index of 100.6%.
• For those hotels 25% larger or greater than their average competitors, the occupancy index is 96%, or a full five points lower than the average hotel.
• For those hotels 50% larger or greater than their average competitors, the occupancy index is 93%.
• For those hotels 100% larger or greater than their average competitors, the occupancy index is 90%.
Clearly, larger hotels (or hotels larger than their competitors) are at a disadvantage in trying to achieve 100% occupancy penetration of its competitive set, but yet often these hotels are still selling more rooms—in sheer volume—than their average competitors.
If two hotels are truly competitive, the size of each property should not have a substantial negative effect on performance indices. The essence of indices is to show how the subject property is performing relative to its fair share. A possible explanation for the slight off-set indices for these two groups lies within their markets’ supply and the overall strength of their comp sets.
For example, if the larger hotel is within a market that does not offer any similar-sized large hotels, the hotel may be forced to add smaller, less competitive hotels into its comp set, ultimately affecting the difference between the subject property’s room count, the average of its comp set and its performance indices.