In 2015, hotel occupancies were at all-time highs throughout the industry. Since most hotels are still not struggling to fill rooms in 2016, we wondered: What is the optimal occupancy for hotels, with respect to profitability?
Obviously, there is no magic occupancy for every hotel, but we can look at profitability for similar hotel segments at differing levels of occupancy using 2015 HOST data.
For this analysis, we used the more than 5,000 hotels that submitted HOST data for 2015, and divided them into segments based on full-service versus limited-service, class and relative average daily rate.
For example, the chart below shows the full-service, upscale hotels and their average-daily-rate distribution. These are primarily select-service hotels, and you can see the most common ADR ranges are the $100-$120 and $120-$140 ranges.
We then compared occupancy and gross operating profit (GOP) margins for the most common ADR ranges within each class and service level. If we chart the median GOP margins by occupancy, we can see where profit margins peak for similar hotel products and ADR levels. The chart below illustrates the median GOP margins at different occupancies for the full-service, upscale segment.
The highlighted orange line shows the median GOP margin for each occupancy interval in the $100-$120 ADR range. If we add a second-degree polynomial trend line, it tells us that at 75.1% occupancy, GOP is maximized at 47.9%.
Beyond the 75.1% occupancy, you can see that the profit margin actually begins to decrease. At the highest occupancy for this set (94%), we show an estimated GOP margin of only 24.8%. This is what we would expect here. At a certain occupancy, there are diminished returns on profit margin as variable expenses and incremental labor costs exceed the incremental revenue of the hotel being nearly full.