Decoding Convention Center Occupancy
1. What Hotels Do
Hotel KPIs are a good and legitimate model for convention centers. Imagine an investment group deciding to buy a hotel. The group looks at the building’s physical condition, business history and forecast demand for hotel rooms in the city. Then they turn to the more cut and dry metrics. Hotel investors around the world ask the same questions. Why, because the logic behind the questions is clear. A few questions and the investors have the answers they need to assess risk and make a rational decision. They will ask about the following:
- Occupancy rate (in %)
- Average Daily Rate (ADR) per sleeping room
- Revenue per Available Room (REVPAR)
All other metrics derive from the above, hotel service revenue, F&B sales, meeting room rental, etc. Moreover, the performance indicators used by hotels are based on the “Uniform System of Accounts for the Lodging Industry”. These standards are universally accepted. They are uncomplicated and elegant and universally accepted by the hotel industry:
For hotels, occupancy is the percentage of available rooms that were sold during a specific time period.
- Supply (Rooms Available) – the number of rooms in a hotel multiplied by the days in the month
- Demand (Rooms Sold) – number of rooms sold by a hotel, does not include comp rooms or “no-shows”
Occupancy is calculated by dividing the demand (number of rooms sold) by the supply (number of rooms available). Therefore – Occupancy = Demand / Supply. Reporting periods for hotels are generally by month and quarter both, with a cumulative average calculated annually. Note that occupancy is not applied to other parts of the hotel such as meeting rooms. The core business of the hotel is to sell sleeping rooms, so the occupancy measure relates to only core performance.
2. Measuring Occupancy for Convention Centers
This is the proper method for measuring occupancy in convention centers:
- Supply (Space Available) – The amount of square feet available (sum of meeting room, ballroom and exhibit hall square footage) over a given time period
- Demand (Space Rented/Licensed) – The amount of square feet rented/licensed (sum of meeting room, ballroom and exhibit hall square footage) over the same time period
Occupancy is calculated by dividing the demand (amount of square footage rented/licensed) by the supply (amount of square footage available). Therefore; Occupancy = Demand / Supply.
Curiously, in my time as a consultant, I have run across more than one convention center using a different method. The most egregiously wrong and absurd example was a center that regarded any occupancy, no matter how small, as 100% for the time period.
3. Occupancy Refinements and Nuances
Occupancy is always questioned when serious capital investments, like center expansion, are considered. If board members don’t question it, bankers surely will. There are always refinements and complexities when measuring something so important. Know what they are and be prepared to explain things rationally. It’s best to have other performance indicators as support.
- Event Move – In and Move – Out Days – Regard these days as occupied days. Here is where you could say that one center’s occupancy figure for an event does not equal another’s. If your occupancy level is traditionally low, you will often permit many more move-in and out days than a center with high occupancy. You may even comp or discount the rent for those extra days. Contrast this to a very busy center where aggressive date/time management means attaining a few more events. Hence, the number of move–in and move–out days is actively negotiated. The difference between the two convention centers may be inconsequential but it is a worthwhile distinction to understand.
- Occupancy Efficiency -What about a history of low nets? doesn’t that devalue the idea of using occupancy as a key performance indicator? It could. In my time at the Javits Center, we always measured show net to gross square footage (expressed as percent) for exhibit halls. Our purpose was to monitor net square footage performance. A low net to gross ratio was often cause for a discussion with show managers whose event may be declining. The Javits Center had many recurring events and still does. If we saw an event consistently fall below a certain net/gross percentage, after a time we’d move the event to less desirable space in favor of a show that was growing. Our advice is to measure net/gross % in parallel with occupancy.
- The Quality of the Events - Where Does Occupancy Fit In? – Occupancy is agnostic to the quality of events. Agreed, there are some low-quality events, like electronic wholesalers or flea market type consumer events. Let the quality issues come out in the other performance indicators such as service revenue per net square foot or the number of hotel room nights generated.
- Events that Are Licensed Outside of Rentable Space? – The example set by the hotel industry applies. They only measure sleeping rooms in their equation. Sleeping room sales is their core business and a simple and pure occupancy figure avoids distortion and equivocating. Rental of meeting rooms or ballrooms is not in a hotel’s occupancy rate. But consider that most other hotel income, meeting room rental, F&B, parking etc., derive from sleeping room sales. Some convention centers conduct business outside normal rentable space (meeting room, ballrooms and exhibit halls). The LA Convention Center and the Javits Center enjoy revenues from film and photo shoots. The price basis for this business is normally a location fee unless they are using meeting rooms or an exhibit hall. That’s not the usual way film and photo shoots operate, however. They favor public spaces and tend to be free ranging, making on-site changes and often using a variety of corridors, outside space, even the roof. It’s tempting to include all the free-ranging space used and include it in occupancy calculations. Our advice is to stay pure, keep this square footage used out of occupancy calculations unless they operate in a fixed rentable space.
4. Parsing Occupancy
Now that you understand occupancy, use it as a statistical foundation for other key performance indicators:
- Compare occupancy by exhibit hall by month – Use it as a basis for setting rental prices. Demand pricing is used in many other business sectors, most commonly airline travel and hotels. You can simulate past years occupancy to see how revenues can change with a demand pricing model. The objective, of course, is to increase rental revenue and create price incentives for events to consider off months and less popular halls. To our knowledge no convention centers use demand pricing as a consistent formal pricing method.
- Calculate monthly and annual energy use and cost per Occupied Day – Use this as a basis for forecasting energy costs, one of your largest line expenses. Graph same and you may be surprised what you find. Our good guess is the result will be non–linear.
5. Seventy Percent (70%) – Why is it Maximum Practical Occupancy?
If your convention center has achieved 70% or greater occupancy consistently for a few years, then congratulations are in order. You are now in a place where demand is probably greater than supply; you can be selective about the events you book, you are in a stronger position to negotiate terms that favor the city and convention center and you can raise rent and service prices.
More than 20 years ago the firm PWC stated 70% to be the maximum practical occupancy for convention centers. Their logic was that convention and trade shows have definite dates and days of the week in mind and typically cannot compromise. Naturally, there are gaps of several days or more between these events. Add holiday times of year such as Christmas when any trade show or convention is rare. Now the event day possibilities lessen, making 70% ring true. Having experienced over 70% occupancy, there are other factors to support PWC’s theory that occupancy of 70% or more can be characterized as “maximum practical”:
- Building and plant maintenance becomes quite difficult. Deferred maintenance lists can grow rapidly. Odds increase for a utility infrastructure failure – power outages, air conditioning failures
- Skilled labor in some cities with low unemployment becomes difficult to find
- Labor and staff end up working long hours. Sometimes inexperienced part-time workers have to be hired, leading to service complaints. Staff vacations and time off become difficult to schedule
- General Decorating contractors, already working with thin profit margins, see profits shrink as they may have to fly in extra management and supervision from other cities. Labor over-time prices are unavoidable, except in cities with “1st eight straight” work rules.