23 Oct

How to Project Future Occupancy

The lodging industry can be highly volatile and extremely sensitive to fluctuations in demand and supply. Therefore, projecting future supply, future demand and occupancy is an indispensable part of hotel development planning process.

At the simplest level, the methodology to forecast future occupancy of the subject development can be illustrated by the below stepped analysis:

steps

Step 1- Identify the Future Supply

A supply analysis should begin with identifying all of the properties that are expected to enter the market in the upcoming years that may create competition pressure on the subject development.

The supply basket needs to include not only direct competitors but also include supply that may have a different positioning and business model to the subject. For instance, when considering the feasibility of an upscale hotel, it is necessary to analyse the impact of an upper midscale condotel in the same area. This is because condotel units, after being sold to individual buyers, can be put back into the rental pool and leased out on a daily basis, hence competing directly with the subject for short-term guests.

Having identified the list of future supply, the competition level of each future supply needs to be assessed, based on the collected information about their scale, positioning, location operator and brand.

The number of rooms created by future supply once opened can be calculated using the following formula:

No. of room nights created each year = No. of hotel keys × competition level × 365 days

For instance, we may assume that there will be 4 properties that enter the analysed market over the next 3 years.

  • Property A (200 keys) and the subject (100 keys) will be opened at the beginning of year 1.
  • Property B (100 keys) and Property C (100 keys) will be opened at the beginning of year 2.
  • Property D (150 keys) will be opened at the beginning of year 3.

The future supply calculation is illustrated in the table below:

table-1

Step 2 – Forecast the Future Demand

To be able to forecast future demand, it is important to understand the different types of demand that can impact the future operation of a hotel/resort. For the lodging industry, demand can be divided into 3 groups:

Total Future Demand = Future Accommodated Demand

                                      + Future Unaccommodated Demand

                                      + Future Induced Demand

  • Accommodated Demand

This type of demand encompasses all guests that are able and willing to stay at a hotel/resort. The quantification of the accommodated demand is equal to total occupied rooms by the market in a specific time.

The forecasting process of Accommodated Demand should begin with identifying demand generators in the market. Demand generators can be any tourist attraction, event or development that is able to generate guests for a destination.    

However, it is not easy to quantify the amount of demand created by a demand generator as each types of guest will be impacted differently. For instance, the visa exemption policy can boost the number of international leisure guests by up to 30% while at the same time the number of domestic MICE guests may not be significantly impacted.

Therefore, before estimating the growth of Accommodated Demand, it must first be segmented into smaller categories. In the example below, we have divided Demand into 3 groups: Leisure guests, MICE guests and others.

table-2

The overall aim of segmentation is to identify and quantify the needs and demand motivation of each segment. Then, based on the identified demand generators, forecast the yearly variation (increase or decrease) for each category:

demand

  • Unaccommodated Demand

This type of demand refers to the number of guests that are willing to stay but are not served by the current supply in the market area during a specific time due to under capacity during peak periods or due to lack of information about the product’s availability.

Unaccommodated Demand requires careful consideration as it may potentially become Future Accommodated Demand. However, it is very difficult to accurately quantify this demand category as it is not currently accounted for in statistical data. One of the common methods is to interview key personnel from competitive hotel/resorts to estimate Unaccommodated Demand as a percentage of Accommodated Demand.

  • Induced Demand

This type of demand refers to the phenomenon that after supply increases, demand also increases. In the hospitality perspective, induced demand is defined as additional demand attracted to a market area as a result of the introduction of a new demand generator. For instance, the opening of a new hotel/resort tends to induce an amount of guests whom otherwise would not have stayed in the market to come and stay thanks to the additional marketing, exposure and publicity created by the new property.

International hotel brands typically attract more international spotlight to a location than a local brand because of their strong international market networks, GDS and websites. New destinations greatly benefit from the induced effect. However, through the passage of time, when the destination becomes popular to travelers, adding more hotel/resorts will not necessarily induce many more guests.

To estimate induced demand, the expected future supply coming on line each year during the projection period must be defined. Then, the amount of demand generated is assessed as a percentage of the number of rooms expected to be opened. The demand induced by each new supply can vary, depending on the intensity of the marketing campaign launched by each new property.

future-supply

Step 3 – Calculate the Future Occupancy of the Market

Based on the forecasted future demand and future supply, the market occupancy is derived by dividing demand by supply for the corresponding year.

table-3

Step 4 – Evaluate the Market Penetration and Occupancy of the Subject Development

Market penetration, in this context, is the measure of the subject development’s occupancy rate compared to the average occupancy of the market, expressed as a percentage.

For instance, a penetration of 90% means that the subject can achieve an occupancy rate that is 10% less than the market average.

It usually takes 3 years for a new hotel to reach a stabilized occupancy level. The new hotel may need to offer discounted room rates during the soft opening year to attract the attention of customers. Therefore, the forecasted penetration factor is usually lower than the average market penetration in the soft opening year and then is increase gradually, depending on the hotel’s positioning, brand, quality and scale of development.

table-4

Conclusion

In an environment where transparent market information is lacking, it is a difficult task to forecast future occupancy. However, through the effective application of a robust forecasting methodology, it becomes a fundamental stage in assessing the feasibility of a hotel development.