The human tragedy wrought by natural disasters, such as the recent damage done along the Atlantic coast by Hurricane Joaquin, can be tremendous.
The death toll within the United States and the Caribbean related to this event is estimated to be in the double digits, and the remediation costs projected to be in the billions.
Hotels, as any business in catastrophes, face threats related to such events.
The hotel industry is exposed to the physical risk of its property being damaged as well as the economic risk of tourism suffering as people avoid areas disrupted by the disaster.
Furthermore, areas most heavily affected face the danger of stigmatization by tourists for some period going forward.
At the same time, however, hotels are uniquely positioned to potentially benefit disaster areas because they have the ability to provide shelter for those displaced by the emergency.
In this report, we examine the effects of natural disasters looking back at past events to try to gain insight to the impacts catastrophes had on hotel performance to focus on what the hotel industry should expect in the aftermath of Joaquin.
To gauge how natural disasters affect economic activity and hotel markets, we looked back at seven large-scale natural catastrophes that occurred since 1988 to measure the impacts in cities for which we have data.
The economic ramifications of disaster events can be calculated by measuring the direct and indirect losses from the catastrophe. Direct physical losses, buildings and infrastructure, are easy to estimate. It is more problematic to estimate indirect losses, such as lost output or wages.
Looking at the economic data, GMP (gross metro product), around large disasters reveals little change in the aggregate economic data for each market (see Exhibit 2). The exception is New Orleans where economic output collapsed following Katrina.
From these four events, it can be seen that the economic impacts of natural disasters are not clear cut.
This uncertainty is due to the “broken window fallacy” that explains how rebuilding creates economic activity by replacing destroyed property, a suboptimal form of growth.
The economic activity occurring to repair a broken window shows up in economic data as increased spending, given that if the window had not broken, no spending to restore it would have occurred.
Similarly, rebuilding after a disaster does increase economic output, but can detract from things people might have preferred to buy otherwise, such as leisure travel.
Additionally, rebuilding activity does produce the potential long-run benefit of creating enhancements to aging property and infrastructure that must be rebuilt to current standards.
While it is not evident from the data examined here, newer more modern properties tend to perform better, serving as a long-term potential benefit of rebuilding efforts.
In general, the economic impact of reconstruction largely depends on two variables: the amount of damage done by a disaster and the amount of public and private expenditures contributed to restoring the economy.
Quick and large investments in restoration and reconstruction projects will produce better economic performance.
Before rebuilding can occur, however, hotels able to operate after a catastrophe often are the beneficiary of increased demand as displaced people need access to places to stay until they can return home.
Looking at hotel data from the seven identified historical disasters, we find that demand rose by an average of 3.4 percent in the quarter of an event.
In the same quarters, hotel supply typically fell or did not grow in a meaningful way as a result of hotels closing for repairs and construction supplies becoming constrained which limits the feasibility of adding new supply.
The markets impacted by the seven disasters in Exhibit 1 had an average decrease in capacity of 1.1 percent in the same quarter as the event.
As a result, occupancy levels rise.
Rates also tend to increase (on average by 4.8 percent) because of compression in availability.
This implies that hotels able to operate after natural disasters are positioned to see boosts in Revenue per Available Room (RevPAR) during the immediate aftermath.