Past threats offer insight into Zika’s impact
To understand what effects, if any, the Zika outbreak might have on the hotel industry, PKF Hospitality Research examined past disease outbreaks and hotel performance.
GLOBAL REPORT— Amid the global concerns over the outbreak of the mosquito-borne Zika virus in the Americas, the effect the disease will have on tourism and the hotel industry is not yet known.
Since the World Health Organization linked the microcephaly cases and other neurological disorders reported in Brazil to Zika infections on 1 February, the Centers for Disease Control and Prevention has urged pregnant women to postpone travel to the countries where the outbreak is occurring (see adjacent CDC map of at-risk countries).
There already have been reports of airlines refunding tickets to travelers as tourists seek to avoid active transmission regions. The hospitality industry is particularly exposed to the risks caused by short-term health and safety issues like Zika because the industry relies on daily demand rather than long-term leases that shelter other real estate classes from volatility.
To understand what effects, if any, the Zika outbreak might have on the hotel industry, PKF Hospitality Research, a CBRE company, examined past disease outbreaks and industry performance.
Past performance during global outbreaks
Over the past 15 years, there have been several large-scale disease outbreaks that had the potential to affect hotel demand. Two of the most prominent were the outbreaks of SARS in 2003 and Ebola in 2014 through 2015
Figure 2 shows the major recent public health concerns based on Google’s search index—which measures how often people are searching for the topic—a metric of the level of public concern about the disease. While the SARS outbreak peaked in 2003, Google’s Search Index only began in 2004. Therefore, the search volume was likely higher in 2003 than represented in the figure.
The current Zika outbreak’s exponential growth rate in public concern is on par with past large-scale global public health events. As fears rise, there is an increasing threat that hotel demand might suffer as people avoid areas with high health risks.
While rising public health risks do cause some changes in travel behavior, the rapid surge in public concern is matched by an almost equally quick decline in anxiety once public health services can react and begin to moderate the pace of disease transmission.
As a result of swift action on the part of health care systems to limit the spread and severity of disease outbreaks, there is not a measurable impact on aggregate hotel demand in response to a public health crisis based on these data.
Most recently, the Ebola outbreak in the U.S. from 2014 to 2015 had no meaningful impact
on hotel rooms sold either nationally or locally in Dallas or Atlanta, the two most affected U.S. cities. In these cases, the public health systems were able to isolate and treat the infected patients with minimal effects on the vast majority of the population. Conversely, markets with large exposure to international tourism might see more negative effects from lost visitors.
The World Bank estimated the economic costs of Ebola in West Africa due to disruptions in travel and trade exceeded $500 million. Another estimate published in Health Economics placed the cost of lost tourism revenue in Mexico during the 2009 Swine Flu outbreak at $2.8 billion. The Zika outbreak thus far has been mostly concentrated in the state of Chiapas in southern Mexico, and expectations are for Zika to have a much smaller impact than the H1N1 outbreak.
Local market impacts
Past disease outbreaks have not caused a meaningful decline in U.S. demand as a result of health fears for potential travelers.
At a local level, however, there have been strong negative repercussions from past epidemics. The most notable historical example of the risks disease outbreaks can create for the hotel industry can be seen in the Canadian hotel market in 2003 at the peak of the SARS outburst. In April 2003, the CDC and WHO issued travel advisories for Toronto in response to the severe SARS outbreak occurring in the area. Figure 3 shows the sharp monthly decline in rooms sold for Toronto, Montreal and New York City during the epidemic.
While not included in the CDC and WHO Toronto travel advisories, cities in proximity to Toronto, including Montreal and New York City, saw hotel rooms sold fall in response to SARS paranoia. In 2003, Canadian hotels saw a 5% decline in rooms sold nationally even as gross domestic product—a strong predictor of demand—rose by approximately 2%.
In contrast, the New York City market recovered more quickly, returning to year-over-year growth in May as concern about the disease outbreak in the U.S. subsided. It is possible tourists who had planned to visit Canada instead went to New York as an alternative location without a travel health advisory. In the context of Zika, this type of behavior could mean fewer people traveling to areas with high infection rates and instead opting to go to areas perceived to have less risk.
Caribbean, Central and South America market impacts
Some of countries in the Caribbean and Central and South America—where the Zika virus is prevalent with high numbers of transmission—have high volumes of international tourists who might opt to stay away from the region if the outbreak is not contained.
The U.S. accounts for approximately half of all tourist arrivals in to the Caribbean. Based on CBRE Hotels’ “Americas research 2015 Caribbean trends,” 12 of the 13 countries covered in the report had experienced positive growth in occupancy and revenue per available room at the time of publication. While Zika might threaten this trend, CBRE Hotels’ and Caribbean lodging expert Scott Smith expects the impact to be mostly negligible, noting some countries will suffer more because of a larger population and inferior health care infrastructures. Other markets such as the U.S. Virgin Islands, the Cayman Islands and Aruba might benefit as they will have stricter health screening for visiting travelers.
The Zika outbreak reportedly has affected Brazil the worst so far, but according to reports from the region Zika has not disrupted Carnival, as the hotels contacted by CBRE Brazil report full occupancy. The potential for disruption of the 2016 Olympic Games in Rio de Janeiro is expected to be low, as Rio authorities are cleaning the mosquito-infested areas.
Furthermore, August temperatures should be much lower, which will decrease the chance for Zika to be spread. The potential for disruption to the international segment is highest in northeastern Brazil and Rio, but at this point, worst-case expectations are for this to not exceed 5% of demand. Occupancy growth is expected to rise 2% and average daily rate will rise in 2016, according to the Brazilian Forum of Hotel Operators.
Ultimately, the risks for hotels are not easily quantifiable because of the unique characteristics of any public health event.
Past data suggests that for the most part, epidemics are not a direct threat to U.S. hotel demand because public health systems can manage the outbreaks. International markets, however, might be more susceptible to adverse shocks as a result of disease outbreaks if their public health systems are inadequate and do not contain the spread quickly and efficiently.
As the CDC and WHO deploy resources to monitor and limit the spread of Zika, a clearer picture of the danger posed by this new outbreak will develop. Download the full report.