Hotel occupancy: Is the three-year stabilization assumption justified?

Corporate and private hotel developers, appraisers, and consultants must make an assumption regarding the period of time it will take a new hotel to reach a stabilized occupancy level. Historically, most developers of future hotel occupancy estimates have assumed a three-year build-up period, although empirical research has not tested this assumption. This research project tests that assumption by analyzing the actual occupancy rates of 3,699 hotels that opened during the previous economic cycle. In addition, this project evaluates the stabilization period based on hotel type, location, size, and service level. This exploratory study develops guidance for analysts of hotel occupancies by evaluating the absolute level of stabilized occupancy by hotel type in an effort to assist with refining the accuracy of prospective financial analyses for new hotels. While this project finds support for the use of a three-year occupancy build-up, it concludes that certain hotel types and locations stabilize more slowly or more quickly, whereas hotel size and service level are not significant determinants of stabilization period. Also, this project finds that certain hotel types stabilize at significantly higher occupancy rates than others.