uploads/2017/03/US-Hotel-occupancy-trend-1.png

Demand Outpaced Supply, Hotel Occupancy Remained Flat in 2016

By

Updated

Hotel occupancy level flat

Hotel occupancy rates, which measure capacity utilization, were almost flat in 2016. According to data released by data company STR for 2016, occupancy rates saw a year-over-year (or YoY) rise of 0.1% to 65.5%.

This rise was driven demand growth’s slightly beating supply growth. Supply in 2016 rose 1.6% to 1.8 billion room nights, while demand rose 1.7% to 1.6 billion room nights. Supply was at its highest since 2010.

Article continues below advertisement

Online penetration helps

Like other industries, hotels have adopted the digitization trend. Many hotel chains such as Marriott International (MAR) now allow customers to book rooms directly on their websites.

This move helps in two ways. First, it’s easier for hotels to sell their rooms through discount offers during off-peak periods, which results in even distribution of demand and overall growth in the occupancy rate. Second, it foregoes middlemen such as Priceline (PCLN), Expedia (EXPE), and TripAdvisor (TRIP), saving hotels money.

Outlook

Demand growth has been outpacing supply growth for the past seven years, as a result of which occupancy levels have been rising. However, STR expects this to change in 2017 and 2018.

STR expects new supply to rise 2.0% in 2017. Demand growth is expected to lag behind at 1.7% in 2017. This growth is estimated to affect occupancy rates, which are expected to fall marginally by 0.3 percentage points in 2017.

Later in this series, we’ll discuss how despite lower occupancy rates, the hotel sector can still grow its operating margins. In 2018, supply in expected to rise 2.2%, and demand is expected to rise 2.0%, resulting in occupancy falling 0.2%.

You can get exposure to the consumer discretionary sector by investing in the iShares Russell 1000 Growth ETF (IWF), which invests ~20.7% in the sector and 0.36% in the hotel industry.

In the next article, we’ll discuss the average daily rates for hotels, another key hotel industry indicator.

Advertisement

More From Market Realist