Katrina: Do the AfterMath

Over the past two years we've become far too familiar with the names associated with hurricane seasons — Charlie, Ivan, Katrina, Rita and Wilma. These storms have claimed and changed lives; they have changed businesses and how many of them operate. But what of the numbers associated with hurricanes? Beyond the hard losses, the expense of search and rescue and the rebuilding, what is the impact on our industry?

Lodging Econometrics reports that in New Orleans as of Sept. 15, 127 hotels, comprising 70 percent of available guestrooms, were closed to the traveling public. In Biloxi, 22 hotels, or 71 percent of available guestrooms, were closed; in Gulfport, 66 percent; in Mobile, the tally was 29 hotels, or 34 percent of rooms.

On the other hand, Bill Fortier, senior vice president of development for Hilton, reports “quite a few call-ins” exploring prospects to develop new product in the Baton Rouge, Lafayette and Shreveport markets. Another example of the opportunities made available amid such seeming devastation: a property destroyed in one of Florida's 2004 storms is now being re-built as a Hampton Inn.

No less an icon in our industry than John Q. Hammons has a different outlook.

“My philosophy has always been to build in a recession when labor and materials are relatively available, thus lowering my construction costs; but this situation is different,” says Hammons, who's not so sure we're facing a recession, although both labor and materials will likely be at a premium. “We'll probably build four rather than eight properties over the next year or two.”

Fortier says the impact of the recent storms divides between two product types. He anticipates a holding pattern in the full-service sector because of the tighter operating margins. Also, the anticipated increases in construction costs will have an influence in these segments.

“Due to the more residential nature of their construction materials, we see the focused-service segment of the business — Hamptons, Homewoods, Hilton Garden Inns — continuing to be developed as currently planned, at least in the short term,” he says. “These properties operate with higher margins and can absorb some of the higher costs; the additional costs — if any — will be offset by the ADR and RevPAR indices. As to the full-service sector, I don't see development slowing, but delayed. Properties in the pipeline will be built as planned; those in earlier stages of planning development will likely be delayed.”

Kirk Kinsell, senior vice president and chief development officer, the Americas, for InterContinental Hotels Group, believes existing damaged properties will be rehabbed or re-developed because the economy is good. He thinks people are in a survival and growth mode.

EXISTING OPERATIONS

Tourism is big business in the Gulf region. New Orleans had more than 38,000 hotel rooms and the industry employed 80,000 people in that city alone. It also has one of the largest and most active convention centers in the country, the Ernest N. Morial Convention Center.

All city-wide conventions, those utilizing any convention center space and three or more hotels, have been cancelled through the end of March mostly because of substantial damage to the convention center. In the interim, all booked business is scrambling for alternative locations, a positive for other convention cities. But the Morial center has 1.1 million square feet and the largest contiguous space exhibit hall in the U.S., so the positive impact will be limited to those few venues that can accommodate such large group business.

New Orleans has seven other non-hotel convention facilities as well; two of the major ones, the Louisiana Superdome and the New Orleans Arena, also sustained damages. Beyond knowing that the Superdome is unavailable for the entirety of the current NFL season, its longer-term status is still unknown.

The impact the storms had on operating expenses remains an unknown. What will happen to insurance rates, for example? Will there be the jumps seen following South Florida's Hurricane Andrew in 1992 or following the terrorist attacks of Sept. 11, 2001? Fuel price jumps can increase operating costs related to anything moved by air, rail or truck regardless of location.

REAL ESTATE SALES

Another question is what impact the 2004/05 hurricane seasons will have on the real estate side of the business — the buying and selling of hotels. Just like the supply pipeline, average selling prices and number of transactions have been going up since bottoming in 2002. According to Lodging Econometrics, the average selling price per room has been approaching the industry peak recorded in 1999.

Patrick Ford, president of Lodging Econometrics, says 2004/05 sales transaction volume is also at record highs. What bearing the closures and need for rebuilding will have on hotel sales is still unknown.

Mark Lommano, president of Smith Travel Research, perceives a net positive for the industry.

“Those hotels that were damaged but can reopen will do well. Hotels in the construction pipeline have been on an accelerated schedule and the storm season will simply delay it. Existing hotels will do well for a few years,” he says.

THE BOTTOM LINE

Some recurring themes that arose from discussions with industry leaders were the rising costs of construction and the uncertainties of the hurricanes' impact on the overall economy. Another issue is how potential oil price hikes and shortages and fuel-price increases will affect our industry.

The September seasonally adjusted unemployment figures released by the Department of Labor showed that while Katrina caused the first nationwide job loss in two years, the hit was not nearly as bad as widely predicted — a loss of 35,000 jobs versus predictions in excess of 150,000. The Federal Reserve was also optimistic, issuing a statement that “fallout from Katrina alone does not pose a persistent threat to the nation's economic health.”

As to costs, the October 10 report from McGraw Hill showed a dramatic jump in pipe prices — PVC, ductile iron and even copper — in the wake of the storms. The company attributed the jump to the immediate surge in crude oil prices (which has since abated) as well as anticipated demand.

“Hurricane Katrina is expected to give inflation in the construction industry a second wind,” reported McGraw Hill. “Prior to the storm, the industry gradually was recovering from last year's resurgence of inflation. While it is too early to determine the full impact of the storm on construction costs, the uncertainty it has stirred up undoubtedly will lead to higher bids for projects just to cover the new level of risk.”

Smith Travel Research increased its 2005 RevPAR growth projection for the total US from 7.6% to 8.2% following its post-hurricane research.

“Despite the obvious attrition from displaced business, the increase in Katrina-related emergency travel combined with the relocated meetings demand to other cities will have a meaningful impact on occupancies,” said Randy Smith, CEO and founder. According to Lomanno, “Nationally, the decrease in room supply due to Katrina's impact coupled with the already strong overall hotel demand allows us to revise our 2005 year-end estimates upward.”

So it's a mixed bag. Fuel prices are high but lower than the initial jumps after the storm. Unemployment is up but not nearly as high as predicted. Even though only in retrospect will we know the true economic impacts, it's not all doom and gloom. It's still a good time to be in the hotel business.


Stephen P. Taylor, CHA is managing director of the Florida office of Horwath Hospitality & Leisure. He has written on branding, hotel technology, financing and appraisals. He can be reached at staylor@horwathHL.com or 561-575-6590.

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