Justifying new hotel supply in a local market depends heavily on competitive set performance, particularly occupancy rates and ADR (average daily rate). These benchmarks help determine whether the market has enough demand to support additional rooms and whether the financial returns can justify the development cost. The right balance of strong demand, rising rates, and limited pipeline competition signals a favorable environment for new hotel investment.
1. Occupancy Rate Benchmarks for New Supply
- A sustained occupancy rate of 65%–70% or higher in the competitive set is typically considered healthy and supportive of new supply.
- Markets averaging above 70% are often undersupplied, particularly if there is peak compression (sell-outs during high-demand periods).
- Extended-stay and limited-service hotels can justify development with occupancy around 65%, given lower operating costs.
- Full-service hotels require stronger performance—closer to 70%–75%—due to higher staffing and amenity overhead.
- Seasonal markets may be viable if they reach 80%+ occupancy during peak quarters and maintain a reasonable off-season base.
2. ADR Levels Needed to Support Feasibility
- A strong ADR trend (average daily rate growth of 3%+ per year) indicates pricing power and unmet demand.
- New construction feasibility typically requires ADR to support a Revenue Per Available Room (RevPAR) of $70–$100+, depending on cost structure.
- For most brands, the following ADR thresholds may apply to justify development:
- Economy/Limited-service: $90–$110 ADR
- Midscale/Extended-stay: $110–$135 ADR
- Full-service/Upscale: $140–$180+ ADR
- Economy/Limited-service: $90–$110 ADR
- ADR must cover fixed operating costs, management fees, and debt service while yielding competitive return on investment.
3. Supply Pipeline and Market Absorption Capacity
- If a market is already seeing new hotel openings, you must confirm that demand is growing fast enough to absorb new rooms.
- Look at net new room additions over 3–5 years and whether occupancy has remained steady or declined.
- A growing market with stable or improving occupancy despite new openings suggests room for more supply.
- Conversely, if ADR is stagnant and occupancy is declining, it may signal overbuilding or demand softening.
4. Compression Nights and Sell-Out Frequency
- Frequent sell-outs during peak events, holidays, or weekends indicate a market that could support overflow or segmentation-specific lodging (e.g., boutique, extended-stay).
- High compression leads to rate surging, improving profitability for new entrants.
- If nearby properties are consistently hitting high ADRs during compression (20%+ above average), that supports new hotel feasibility.
5. RevPAR Index (RPI) and Competitive Set Strength
- The RevPAR index compares a brand’s performance to its comp set—an RPI over 100 means it’s outperforming the market.
- High RevPAR in the competitive set (driven by strong occupancy and ADR) supports projections for new development.
- Brands will often require historical comp set data showing a minimum of $75–$100 RevPAR to approve a new franchise or flag.
