Seasonality has a profound impact on the efficiency and profitability of hotels. It is a crucial challenge for the lodging industry and has been held responsible for creating many difficulties faced by the industry: problems in gaining access to capital, in obtaining and holding full time staff, for low returns on investment causing subsequent high risk in operations and for problems relating to peaking and overuse of facilities.
Seasonality is often taken for granted as an inevitable feature of the lodging industry. It is often assumed that the seasonal variations are identical, or almost identical patterns which occur from year to year. But as our previous post and the graphs below demonstrate, the seasonal nature of room demand is constantly changing. The lack of in-depth and longitudinal research has hindered our understanding of this pervasive force on the lodging industry.
In the same way that hotel investors seek to determine the optimum holding period for hotels and best possible time to enter and exit a hotel market cycle, we believe that investors need to explicitly determine the peaking index for individual markets. Such as index can be used to rank markets by the degree of seasonality for a market and how the index has changed over time. Identifying markets with a low peaking index increases the odds of maximizing efficiency and profitability. While some investors may intuitively believe some markets are less seasonal than others, it is important to determine how the peaking index has trended over time.
Before we examine the peaking index, let’s examine the following graphs which illustrate the extent to which seasonality can change. The occupancy of Miami hotels has trended upwards for every month except February since 1987. The biggest shifts have come in April, May and June. April’s occupancy has trended up by 14.7 percentage points from 66.2% in 1987 to 80.8% in 2018. The occupancy for May has trended up by 14.6 percentage points from 60.6% in 1987 to 75.3% in 2018.
The Trend of Seasonality for Occupancy in Miami/Hialeah Hotels 1987-2018
The occupancy of Hawaii hotels has trended downwards for the months of January, February, April, June, August and December as illustrated in the following graph. The biggest declines have come in June, February and August. June’s occupancy has trended down by 10.9 percentage points from 76.6% in 1987 to 65.6% in 2018. The occupancy for February has trended down 6.6 percentage points from 78.8% in 1987 to 72.2% in 2018. Likewise, August’s occupancy has trended down by 6.6 percentage points from 80.5% in 1987 to 74% in 2018.
July has seen the largest increase in occupancies rising 12 percentage points from 71% in 1987 to 83% in 2018. October and November followed with 5.4 and 4.9 percentage points over the same period. A quick perusal of the two graphs reveals that Hawaii has enjoyed more constant demand for its hotels throughout the year.
The Trend of Seasonality for Occupancy in Hawaii Hotels 1987-2018
To assist our clients select and target hotel markets for potential acquisition and or development opportunities, we have developed the Peaking Index.
What is needed is an index that can compare the acuteness of seasonality for different markets and take into account all months, not just the peak and trough month. The peaking index for a hotel or hotel market summarizes a substantial amount of data on temporal occupancy levels into a single value. The measure is an open-ended scale with a minimum value of 0.00. The greater the degree of concentration (peak occupancy), the greater the value of the index. The index would equal 0.00 if the occupancy were the same in all months. Its value increases as occupancy levels rise in certain months.
By itself, the index is not especially informative. The value depends not only on the degree of peaking but also on the total volume of business and on the choice of time periods used for analysis. The primary use of the index, therefore, is for comparison between hotels or for examination of trends in peaking over time in one market. Based on the monthly occupancies for the Miami, Hawaii, San Diego and Aspen hotel markets, we have developed rolling 12-month peaking indices as illustrated in the following graphs.
Based on the analysis we can conclude that Hawaii hotels have historically experienced more even distribution of demand throughout the year. Furthermore, the pattern has remained relatively constant over the period from 1987. As a consequence hotels in this market are likely to have achieved greater efficiency and profitability than hotels in Miami. Miami’s peaking index has generally declined over the years, leading to more even demand throughout the year.
Peaking Index Trends for the Miami and Hawaii Hotel Markets 1987-2018
Peaking Index Trends for the Aspen and Hawaii Hotel Markets 1987-2018
Peaking Index Trends for the San Diego and Total US Hotel Markets 1987-2018