How Hurricane Harvey could affect US hotel industry
How Hurricane Harvey could affect US hotel industry
01 SEPTEMBER 2017 8:13 AM

A look back at the impact of Hurricane Katrina and Superstorm Sandy may provide some hints as to what Hurricane Harvey will mean for the total U.S. lodging industry.

HENDERSONVILLE, Tennessee—Now that Hurricane Harvey has moved off the Texas Gulf Coast and its devastation becomes more visible, it is worth considering how this single event could affect U.S. hotel performance. While it is too early to put hard numbers on the loss of inventory or revenue, looking at the effects of Hurricane Katrina and Superstorm Sandy could assist in thinking about how the U.S. hotel industry results could fare.

Supply will drop
We expect that the room supply number of Texas will decline for at least a year. After Katrina, Louisiana room supply dropped by roughly 25% between September 2005 and August 2006. This equated to a supply loss for the U.S. of 0.5%, in fact negating the slow U.S. supply growth we had reported so that—for the first time in history—the annualized supply growth for the U.S. was negative.

It is still too early to tell which hotels are closed for business. We hope that the number is relatively small, and current industry commentary gives us reason for optimism. But it is not a stretch to assume that the supply decline in and around Houston will affect the national numbers.

In our latest forecast, we projected that U.S. room supply should grow by 2% in 2017. It is likely that we will need to revise this number downward.

Renovation and rebuilding work will likely take time. Construction crews were hard to come by prior to the hurricane and will now be even more scarce. Costs for raw materials and labor will increase and will also affect the new construction pipeline in other southern states as resources are reallocated to Houston. We have not yet seen the full impact of the water damage on existing pipeline products, but it is likely that the number of rooms in construction in our pipeline database will also be negatively affected, which will then impact supply growth numbers going forward.

Demand will hold or increase slightly
If a hotel makes it through the storm unscathed or can be re-opened pretty quickly after the event, there is a high likelihood that it will post very strong demand numbers in the months to come. Demand will be generated by multiple sources: displaced residents, FEMA and other federal personnel, insurance adjusters and contractors. Most of these will stay for months in the area keeping room demand numbers artificially high.

Group demand, on a national level, has historically not suffered as displaced groups found other venues in which to meet. Large meeting markets in Texas such as Austin, Dallas, San Antonio or in southern states (Orlando, Chicago, Nashville, Atlanta) may benefit from meeting planners looking for new venues while Houston is rebuilding.

As oil prices for the U.S. are expected to increase given the impact on U.S. refinery capacity, it is worth remembering that oil prices have little to no discernable impact on demand in the U.S. And even if leisure travelers would vote with their wallet to postpone a trip, the timing of Harvey, after the summer holidays, will likely make the impact on leisure spend even more muted.

Occupancy should increase
If the room supply declines, but room demand remains steady, then occupancy is increasing. This could imply that our STR forecast of 0% occupancy growth for 2017 is too low and that we may be able to report a slight occupancy increase this year and through the second half of next year.

ADR should not be affected
Hoteliers are first and foremost in the business to provide shelter and secondarily to make money—as Carter Wilson was able to show after Superstorm Sandy, when called upon hoteliers open their doors quickly and without taking advantage of people in need. 

A leveling effect on room rates could also be the U.S. government per diem rate, which is paid by federal employees. This rate is set by the General Services Administration and stands at $91 for fiscal year 2017. For Houston’s main counties (Montgomery, Fort Bend and Harris), the per diem rate currently stands at $135. Those three counties had ADR of $105 ending in 2016. In addition, FEMA might pay for hotel rooms of displaced people after shelters close.

Groups looking for new meeting venues may have to contend with markets that are already fairly full. Meeting rooms and room blocks may be at a premium if conferences cannot be flexible in their timing or choice of market. But if meeting planners have some ability to adjust their schedules, they may find willing hoteliers who are able to accommodate their needs with no impact to the room rate that was expected.

Overall, we expect little to no impact on the U.S. ADR performance.

RevPAR growth could be stronger than expected
STR currently projects that RevPAR in 2017 will increase around 2.3%, driven by ADR increase of 2.3%. Given the slightly stronger occupancy expectation, it is likely that we may have to adjust our forecast up a little to allow for the new reality after Harvey.

For 2018, our RevPAR forecast currently stands at 2.3% growth, driven by an ADR increase of 2.5% and a slight nationwide occupancy decline. It is, of course, too early make any predictions about the supply numbers in early 2018, but it is not too farfetched to assume that supply growth in 2018 will also be affected, giving some positive lift to the 2018 results.

This article represents an interpretation of data collected by STR, parent company of HNN. Please feel free to comment or contact an editor with any questions or concerns.

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