By Bram Gallagher, Economist at PKF Hospitality Research, a CBRE Company
Conventional hotel market predictions are based on time series analysis of key variables, and these kinds of predictions have well-understood properties when businesses operate as usual. Exogenous demand shocks—shocks originating beyond the scope of any particular hotel market—have the potential to create unpredictable disturbances, in part by creating emotional or psychological barriers to travel that we call stigma or fear of travel.
Previous research by PKF Hospitality Research, a CBRE company, into exogenous demand shocks examined fear of travel brought on by the emerging Ebola outbreak in 2014 and the SARS outbreak of 2003. Geopolitical events such as wars or terrorist attacks, like disease outbreaks, also have the potential to create disturbances. But how do geopolitical events affect the hotel industry, and how severe are these effects? We find that international events cause little effect, while events affecting domestic locations have more immediate effects with durations depending on how quickly the fear of travel is assuaged.
The effect of war Wars have a theoretically ambiguous effect on demand, alternatively seen as having a stimulatory effect on spending or bringing destruction of resources with potentially higher government debt and uncertainty. To distinguish the effect felt in the hotel market, U.S. hotel data provided by STR is aggregated and year-over-year differences before and after events are calculated for three key economic variables: real average daily rate, occupancy and revenue per available room. Two conflicts that might have had consequences for the hotel market are the Gulf War that began in August 1990 and the Iraq War that began in March 2003. Although the Gulf War was shorter, less costly and involved a higher number of active military personnel than in the invasion of Iraq, the two conflicts can be compared by examining the effect surrounding the initial acts of war.
The effects of the Gulf War on the hotel market are difficult to isolate from those of the July 1990 to March 1991 recession, because the dates of the conflict and recession overlap. Year-over-year decreases were not felt immediately after the beginning of the war. Rather, losses intensified as the conflict and recession progressed, providing evidence against a sudden change in uncertainty brought on by the start of the war.
Estimates put the cost of the Gulf War at 0.3% of gross domestic product at its peak, too small of an amount compared to the 2.3% decrease in growth resulting from the recession for war expenditures to be the dominant factor in declining hotel fundamentals. Year-over-year change in RevPAR and occupancy reached an all-time low in March 1991, the month after the conflict ended. However, improvements were rapid, making up half the losses to RevPAR and occupancy growth rates in April. A complete recovery to pre-war levels was obtained by the end of 1991.
To isolate the effects of the war from those of the recession, Figure 1 illustrates year-over-year changes to GDP and unemployment rate along with RevPAR. The suddenness of the recovery in the hotel industry in April 1991 compared with the sluggishness of the overall economic recovery indicates that the easing of international tensions and the return of more than half a million troops from the Gulf might have helped spur recovery in the hotel industry ahead of the economy as a whole. This immediate stimulus could have been produced by the one-time reduction in fear of travel that resulted from the end of the Gulf War.
Sickness and disease In contrast to the Gulf War, the U.S. economy was entering into an expansionary period during the beginning of the Iraq War; however, the SARS outbreak depressed air travel during the buildup to and beginning of the Iraq War.
It would be difficult to imagine lower demand than during the aftermath of 9/11, and positive growth rates were measured in the hotel market during September 2002. Year-over-year growth decreased as the SARS outbreak unfolded and received more media coverage, starting as early as January 2003 and becoming pronounced in February when an American businessman abroad received media attention for contracting severe acute respiratory syndrome.
To shed light on the timing of the effects of SARS and the Iraq War, we examined the hotel market in Toronto, the site of the only city-wide SARS outbreak outside of Asia. Previous research by PKF-HR observed that the SARS outbreak affected gateway cities with international travel most strongly, so New York City is included for comparison.
Figure 2 illustrates the changes to RevPAR in Toronto, New York City and in the U.S. Toronto experienced a catastrophic decrease in RevPAR in April when the Worldwide Health Organization issued a travel advisory for Toronto over outbreak concerns. New York City and the U.S. suffered peak losses in April as well. RevPAR rates in Toronto, New York City and the U.S. continued to experience losses in May and June but recovered by the fourth quarter of 2003 after an announcement by the WHO at the end of June that the epidemic was contained, even as Iraq War expenditures accelerated. A graphical comparison suggests that the hotel markets in New York City and the U.S. experienced a muted version of Toronto's SARS effect as RevPAR declined because of fear of travel over SARS rather than the expense of foreign war.
Travel amid terror The terror attacks of 11 September 2001, unlike the Gulf and Iraq wars, occurred unexpectedly and were committed on American soil.
The effects were felt immediately, as illustrated in Figure 3. While the U.S. was already six months into a recession in September 2001, precipitous declines occurred in the month of the terror attacks. Rates of change recovered to their pre-9/11 and pre-recession levels by April 2002, but while there was improvement in September 2002 over the previous year's disastrous levels, steady growth was not achieved until April 2004.
It is difficult to determine the exact length of the effect of the attacks on the hotel market because there is undoubtedly overlap with the effects of the SARS outbreak. Effects on ADR were particularly seen in New York City, as illustrated in Figure 4. Growth was positive for ADR in the fourth quarter of 2002, but stayed under 9%. ADR shrank again in January 2003 and stayed constant or shrinking until March 2004.
Overall outlook Major geopolitical events have limited effects on the hotel market, and these can be overwhelmed by broad macroeconomic trends or concurrent events acutely affecting fear of travel.
The Gulf War had no negative effects that could be discerned from those of the 1990 recession, although the end of the war and the return of troops might have had a slight stimulatory effect. The Iraq War seemed to have no effect at its onset that could be discerned from that of the SARS outbreak, and the market recovered as the war persisted but as the SARS outbreak was contained.
The attacks of 11 September 2001 had the strongest and most easily distinguished effect, and the U.S. market potentially took three years or longer to recover. In contrast, while the stimulus from the Gulf War lasted perhaps one to a few months, the beginning of the Iraq War had no clear effect, and the SARS outbreak's effect had evaporated by November 2003 in Toronto, the Western city hit hardest by the outbreak. We conclude that during this time the U.S. hotel industry was insulated from international geopolitical events but not catastrophes and sickness directly affecting fear of travel to domestic locations.
