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Natural Occupancy Rates and Development Gaps: A Look at the U.S. Lodging Industry

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[Excerpt] The recent surge in lodging development has many observers asking whether the volume of rooms in the new construction pipeline is proper, given short- and long-run demand projections. According to recent projections, the U.S. lodging industry will add approximately 125,000 rooms to the supply in both 1998 and 1999, equating to a 3.5-percent supply growth. Many observers argue that this growth is excessive, given expected long-run demand growth of no more than about 1.5 percent. The counter argument is that the recent surge in supply simply makes up for a lack of development early in the decade. This article provides estimates of long-run stabilized occupancy rates, called "natural occupancy rates" (NOR), for the United States and its 24 largest lodging markets. Using these natural occupancy rates, I developed estimates of both long­ run and short-run excess demand (i.e., opportunities to construct more supply). By comparing actual occupancy rates to the natural rates, a development gap is estimated both in relative terms, as an "occupancy gap," and in absolute terms, as a number of rooms. Based on the Smith Travel Research data from 1987 through 1998, the natural occupancy rate for the United States is 62.9 percent, and its long-run occupancy gap is 0.8 percent. This means that actual long-run occupancy over the period of 1987 to 1998 was 0.8 percent above the natural rate. Expressed differently, the United States has a long-run "room gap" of approximately 51,000 rooms. By this analysis, that number of rooms could be added to the supply to meet growing demand. The short-run occupancy gap for the U.S. is 1.7 per­ cent, based on 1997 occupancy rates meaning that the industry would need approximately 96,000 additional rooms if long-run occupancy continued at 1997 levels. In this article I will explain how those calculations came to be.

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1999-04-01

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natural occupancy rates; NOR; lodging; occupancy gap

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Required Publisher Statement: © Cornell University. Reprinted with permission. All rights reserved.

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