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Growth in Demand, Limited Supply Drove US Hotel Occupancy Rates

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Jan. 22 2016, Updated 8:11 a.m. ET

Occupancy rates

Occupancy rates, which measure hotel capacity utilization, saw unprecedented growth in 2015. STR Global, a London-based hotel data and benchmarking firm, noted that November 2015 occupancy rates saw a year-over-year growth rate of 3.2%. Strong occupancy rates are being driven by tight supply and strong demand for both business travel and leisure travel.

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Effect of online channels

Supply and demand rates determine the occupancy rates for the US hotel industry. The online distribution channel has made it easier for hotels to sell their rooms during off-peak periods.

To fill their rooms, hotels offer rooms at discounts during these periods. This has resulted in an even distribution of demand, resulting in the overall growth of their occupancy rates.

Outlook

Supply seems to be catching up with demand in 2016. Construction activity is largely affected by the availability of capital, profitability in the industry, and interest rates. Although the Federal Reserve increased its federal fund rate by 0.25% in December 2015, this did not appear to have affected the construction activity. The construction industry expected the increase in interest rates.

STR Global expects the new supply to grow 1.4% in 2016 compared to 1.3% in 2015. The demand is also estimated to grow by 2.2% compared 2.6% in 2015. This is estimated to affect hotel occupancy rates, which are expected to increase marginally by 0.8% in 2016 compared to 1.7% in 2015. In the next article, we will discuss how the hotel sector can still grow its operating margins despite lower occupancy rates.

Investors can gain exposure to the lodging sector by investing in the iShares US Consumer Services ETF (IYC). IYC invests 11.5% in the lodging sector, which includes 0.5% in Marriott (MAR), 0.4% in Starwood (HOT), 0.39% in Hilton (HLT), and 0.06% in Choice Hotels International (CHH).

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