The Influence of Occupancy Change on Hotel Market Equilibrium

Abstract

Supply and demand imbalances in hotel markets are known to cause short-term growth or declines in rate and are largely (but inefficiently) self-correcting over the long term. However, looking at aggregated monthly supply and demand shifts for a market overlooks the dramatic shifts that typically occur daily within a market. Building on natural occupancy rate theory and using daily performance over a 5-year period for the Seattle Metropolitan Statistical Area (MSA) and submarkets, this study shows that examining daily occupancy patterns provides important insights into average rate growth. Furthermore, the analysis shows that the real average rate growth is a function of not only absolute occupancy levels relative to the market’s natural occupancy rate but also relative changes in occupancy, and that change in occupancy moderates the relationship between occupancy and average rate growth. In addition, submarkets within the MSA have significantly different attributes, including different natural occupancy levels and different responses to changes in occupancy. Implications for hotel investors, managers, and policy planners are then presented.