March 6, 2020
By Bram Gallagher


Of all commercial property types, hospitality is likely the most sensitive to fear and uncertainty. While office, multi-family and industrial properties have long-term leases that force some delay in reaction to new events, travel plans can be canceled as an immediate consequence of news of a disease outbreak, such as COVID-19. Airline cancellations and business-wide travel bans have jumped in response to the rapid spread of COVID-19, a novel and potentially deadly virus, and we expect that the lodging market will feel profound reverberations in this and the following quarter at a minimum. Questions of key concern to the hotel operator and owner include: where will these disruptions be felt most keenly; how severe will they be felt; and what is the recovery time for the market after an outbreak?

We consider two primary sources of disturbance for the lodging market as well as a secondary economic source: “without” and “within”. Travel can be affected from “without” when areas with outbreaks do not send travelers and from “within” where local outbreaks discourage travel to an area. In the initial phases of the current COVID-19 pandemic, much of the total disruption to the lodging market was expected to come from the “without” channel, and further that the effect would be relegated chiefly to travelers from China. More recently, as COVID-19 has spread across several countries and the likelihood of a domestic outbreak has increased, understanding the “within” scenario has increased in urgency. Lastly, even without a direct effect, spillover economic effects, such as a decrease in the price of oil, may impact some markets.

Travel form China

The SARS outbreak in 2003 is a natural basis for comparison for the effect of travelers from China. Illustrated in Exhibit 1, travel from China decreased 30% on a year-over-year basis in 2003, rebounding over the next two years.
Coronavirus_fear of Travel_Figure1_Chart
The scale of visitation is a significant difference in travel from China to the U.S. in the current era compared to when the SARS outbreak occurred. The number of visitors from China accounted for approximately 0.5% of all visitors to the U.S. in 2002, and 4% by 2018. Over the same period, Chinese tourism expenditures increased from 2.3% to 14.2%, underscoring the importance of China to the U.S. total tourism exports and indicating that the traveler from China on average spends significantly more than the average from all other locations. The trends in travel from and tourism exports to China is illustrated in Exhibit 2.
Coronavirus_fear of Travel_Figure2_Chart
By scaling the effect of the SARS outbreak proportionately to match the increase in visitation, we calculate that the probable losses from Chinese travel to the U.S. could be as much as 0.3-0.4% of total U.S. hotel demand. While not overwhelming on a national level, the loss in demand comes from a relatively high expenditure segment, potentially putting additional pressure on rate as domestic alternative demand is sought out. In addition, the effect will be highly uneven geographically. A quarter of all visitors from China visit Los Angeles, and another quarter visit New York. Decreases in contributions from Chinese tourism could account for RevPAR losses on the scale of 3-5% compared to previous expectations. The top five locations and corresponding proportions are tabulated in Exhibit 3.
To better anticipate the effects of COVID-19 on travel, we examine historical outbreaks and other incidents sparking fear of travel. Exhibit 4 illustrates the length of time it takes a market to recover RevPAR growth by comparing the 12-month moving average of RevPAR change after an event has occurred to the 12-month moving average prior to the event.
Coronavirus_fear of Travel_Figure4_Chart
The severity of the event influences the severity of the effect on RevPAR growth. The SARS outbreak in Toronto diminished 12-month moving average RevPAR change 18%, almost as large an effect as the 9/11 Terror Attacks had in New York. On the other hand, the Dallas Ebola outbreak, limited to three people and not warranting a travel advisory from a large health institution, had a minimal effect. Interestingly, the length of time to recover is markedly similar regardless of the severity. RevPAR growth achieves parity with before-event growth rates in nominal terms in about 15-18 months. The two events in which recovery took longer, the 9/11 Terror Attacks and the 2008 Crash, shared a compounding element of underlying economic weakness and disruption.

Breaking down the decline in RevPAR into occupancy and ADR changes reveals another characteristic of post-event recovery. Illustrated in Exhibits 5a and 5b, Toronto occupancy and ADR change plummeted in the wake of the SARS outbreak. While occupancy recovered quickly as travelers regained confidence in the safety of Toronto, ADR had a more asymmetrical recovery as revenue managers hesitated in raising prices.
Coronavirus_fear of Travel_Figure5_Chart
Coronavirus_fear of Travel_Figure6_Chart

Spillover Economic Effects

COVID-19 may have influenced recently declining oil prices, which could cause lingering pain in some markets. Although not as dramatic as the 2014 oil price crash, current oil prices are slipping significantly on expectations of lower future demand from Chinese industrial production, and possibly lower output worldwide. Some markets are highly dependent on oil prices to stimulate business travel. Exhibits 6a and 6b illustrate the negative effect that the 2014 oil price crash had on Houston occupancy and ADR. The graphs are truncated at 2017 as hurricane effects masked lingering effects of oil prices; however, we anticipate that even without a domestic outbreak there or significant tourism from China, COVID-19 will have a depressing effect on RevPAR growth in Houston.
Coronavirus_fear of Travel_Figure7_Chart

Coronavirus_fear of Travel_Figure8_Chart
We expect to see a short, steep drop in demand (approximately four to six months), followed by a relatively quick market recovery as travel restrictions are lifted. As with other major events, uncertainly remains an issue and will contribute to hotel managers’ ability to maintain rates, thus impacting revenue.

CBRE EA is closely monitoring the lingering effects of COVID-19 and will consider the pandemic’s impact in our upcoming forecasts.