Data analysis: Ebola impact on hotel industry
21 OCTOBER 2014 7:05 AM
PKF examines U.S. data comparing the 2003 SARS episode to the current Ebola situation.
ATLANTA—By most financial measures, the United States hotel industry has recovered from the depths of the Great Recession. According to data from STR—parent company of Hotel News Now—demand growth outpaced the increase in supply nationally, in the vast majority of U.S. markets, every quarter since the first quarter of 2010. This is a record run that we believe will persist through the third quarter of 2015. Pricing power clearly rests with property managers, and real increases in average daily rates have been significant. The current forecast from PKF Hospitality Research, a CBRE Company, calls for a record national occupancy level in 2015.
The predictable events that have historically brought an end to the good times for hotels (i.e., over building, economic contraction, high oil prices) seem benign as we progress through the final quarter of 2014. We also know that the bursting of an asset price bubble (e.g., the stock market in 2000, housing in 2008) can have a severe negative consequence for the hotel industry. Is the U.S. in a bubble today? We’ll know that answer once the bubble has deflated.
Recent history also reveals that severe demand shocks occur when unexpected events lead to a fear of travel. The impact of the terrorist strikes of 9/11 on U.S. hotel performance was quick and substantial.
The question on the minds of many in the travel-related industries today: Is the current Ebola epidemic in West Africa, which has now migrated to the U.S., the next event to keep people from traveling away from home? And if so, what will be the impact on the domestic hotel industry? This question cannot be answered today for obvious reasons; however, a review of history may stimulate some additional insights concerning potential market behavior in the months ahead.
To mitigate confusion over this important topic, it is critical to recognize that authoritative conventional wisdom indicates that the Ebola virus is spread through the transmission of bodily fluids. This belief should be considered when benchmarking potential outcomes from the Ebola situation against previous health-related episodes (such as Severe Acute Respiratory Syndrome).
Our colleagues in the Global Risk Management Group at CBRE prepared an informational piece that speaks to issues we should all be cognizant of. As they note therein:
“It is important to note that accurate information and guidance from the appropriate authorities (e.g. World Health Organization, Centers for Disease Control) is critically important to prevent unnecessary actions, the spread of false facts and other responses that may result in more confusion than the event may warrant.”
While much is known about the Ebola virus, the recent headline media focus has been on highlighting what perhaps is not known, or well understood. The level of public interest surrounding this issue continues to escalate, as illustrated by the Google year-to-date through 16 October 2014 search data in Graph 1:
Certain parallels now exist between what seems to be occurring during the initial stages of this health issue and what happened in 2003 when SARS was a global issue.
Understanding how the U.S. hotel industry was impacted by this event might help form expectations as to what the future might hold as the Ebola story runs its course.
The SARS epidemic reached the public spotlight in February 2003 when an American businessman traveling from China became afflicted with pneumonia-like symptoms while on a flight to Singapore. On 12 March of that year, the WHO issued a global alert, followed by a health alert by the U. S. Four months later, on 27 June, the WHO said the world population should be SARS-free within the following two to three weeks. Because of SARS, and for a period of approximately five months, fear of travel characterized the marketplace.
The impact of SARS on the U.S. hotel industry
To develop an understanding of the impact of the SARS epidemic on the domestic hotel industry, we consider the following:
- duration of the episode: February through June 2003;
- performance measures to address national change in gross domestic product, occupancy, ADR and revenue per available room;
- presence of a severe weather event(s); and
- markets to evaluate: all U.S. hotels and the 55 “Hotel Horizons” major U.S. hotel markets.
Data from the National Oceanic and Atmospheric Administration, Moody’s Analytics (GDP) and STR (occupancy, ADR and RevPAR) for the entire U.S. (see Chart 1, Graph 2) reveal the following:
- According to NOAA, severe weather events during the period studied were limited to late winter snow storms in March and April, both of which were isolated in the central/upper Midwest parts of the country. This did not cause a material disruption of travel when viewed on a national scale.
- National economic growth, as measured by the change in GDP during the period studied, averaged approximately 2%. Growth accelerated during the second half of 2003, thus suggesting that any negative impact from the SARS episode on the overall domestic economy was likely limited.
- Unlike GDP, the monthly year-over-year change in occupancy, ADR and RevPAR was negative, with the magnitude of the contraction peaking in April 2003, the month after the WHO global alert announcement.
- Thus, it appears that a fear of travel surfaced even before the WHO announcement in March 2003 and accelerated quickly as awareness of the SARS situation spread.
Click chart to enlarge.
SARS local market impact varied
PKF-HR conducted detailed analyses of the historic behavior of the 55 U.S. cities that comprise the Hotel Horizons forecast universe. Similar to the analyses described above for all U.S. hotels, we also evaluated the year-over-year change in performance for the period February through June 2003. Select observations from looking across all 55 Hotel Horizons markets are as follows:
- Cities in Florida saw little impact from SARS. At SARS’ peak impact on the U.S. hotel market (April 2014), major cities in Florida saw a 3.8% increase in RevPAR.
- Other major “drive-to” markets in the Southeast, such as Memphis, Tennessee; Nashville, Tennessee; Richmond, Virginia; Charleston South Carolina; Charlotte, North Carolina; and Norfolk, Virginia, also realized minimal impact with RevPAR change staying mostly positive during the epidemic.
A review of data reveals that, with a few exceptions, the negative impact related to SARS was greater in these cities than in the U.S. as a whole. We attribute this to the fact that most of these markets are gateway cities and thus traditionally accommodate a higher volume of inbound international travelers. The SARS episode was initiated in China and Singapore; the Ebola outbreak is currently centered in Western Africa.
According to WHO, SARS cost the U.S. about $7 billion. We estimate that the U.S. hotel industry lost approximately $2 billion in rooms’ revenue because of SARS (calculated by applying the average growth rate of rooms revenue for months without SARS, 4.1%, in 2003 to months affected by SARS and then subtracting the rooms revenue that was actually achieved).
If the Ebola outbreak moves to the U.S., will the impact on hotels be worse? To address this question, and considering that SARS started in China, one need only to look at the hotel performance in Hong Kong during calendar year 2003. Graph 3 shows the STR-reported monthly year-over-year RevPAR change in Hong Kong during this period.
Based on reports thus far, it appears likely that the Ebola virus will be controlled, and perceived fear of domestic travel will not exceed the actual risk by a wide margin.
Reasons to not worry about the Ebola situation include:
- There have been only a few isolated incidents so far in the U.S.
- Authoritative conventional wisdom indicates that the Ebola virus is spread through the transmission of bodily fluids, whereas the SARS virus was transmitted much more easily through the air.
- News reporting is more intense than in 2003 so that the reality and the perception of risk are better aligned.
- Border screening is more sophisticated than in 2003.
- The resource commitment by government and health organizations to battle the illness is rapidly increasing (thus suggesting the potential for preemptive remediation).
- U.S., Dallas and Atlanta (the two cities where the Ebola issue is most visible) weekly RevPAR numbers reported by STR are not showing any evidence of an impact.
That being said, reasons to worry include:
- Cases have been reported inside U.S. boundaries.
- Protocols are not universally followed throughout the U.S. because of localized health case treatment and lack of training.
- Illness appears to be more deadly than SARS and transmission is not fully understood yet.
- Based on the SARS situation, the fear of travel appears in the hotel data before a warning by the WHO.
The opinions expressed in this column do not necessarily reflect the opinions of Hotel News Now or its parent company, STR and its affiliated companies. Columnists published on this site are given the freedom to express views that might be controversial, but our goal is to provoke thought and constructive discussion within our reader community. Please feel free to comment or contact an editor with any questions or concerns.