FEATURE ARTICLE, APRIL 2006

TEXAS, HOTELS AND THE HURRICANES
The hotel industry in Texas continues to be affected by hurricanes Rita and Katrina.
Abigail Marks

As of February, 4,500 evacuees from Hurricane Rita and Hurricane Katrina who were are being housed in hotels are no longer subsidized by FEMA (Federal Emergency Management Agency). FEMA has spent $529 million so far to house evacuees in hotels around the country. So, now that FEMA has dropped the subsidy for many evacuees, it seems that several of the hotel markets that have seen inflated demand during the past several months may record subsequent declines in demand in 2006.

Many Texas cities were destinations for evacuees before and after hurricanes Rita and Katrina. A dramatic increase in demand was witnessed during the months of September and October in Austin, Dallas, Fort Worth and Houston. In those 2 months, Houston recorded increases in demand 24.8 percent and 34.3 percent, respectively, compared to the previous year’s level. With slightly less magnitude than Houston, Austin, Dallas and Fort Worth recorded substantial double-digit year-over-year demand growth in the third and fourth quarters. This impressive growth in demand exemplifies the extremely positive impact that the hurricanes had on the hotel industry in Texas.

Furthermore, occupancy rates hit all-time highs in the fourth quarter in Austin, Dallas, Fort Worth and Houston due to the combination of little supply being added to these markets and demand being so high. In Houston alone, the limited-service occupancy had a net change of 20.4 percent in the fourth quarter compared to October 2004, and in the third quarter, occupancy had a net change of 11.3 percent compared to the year before. Even without historical justification, it is safe to assume that these changes in occupancy are atypically high for Houston. Although October was the height of the hurricane effect in terms of occupancy adjustments, November and December still recorded significant changes in occupancy compared to the previous year — most likely due to the subsidy extensions granted to the hurricane evacuees still residing in temporary housing.

The dramatic increases in occupancy levels in the Texas markets likewise caused huge boosts in revenue per available room (RevPAR) in the fourth quarter. Each market saw RevPAR jump up more than 20 percent (for Houston it was more than 50 percent) in that one quarter compared to previous year levels. Growth spurts such as these, however, simply cannot be maintained once the evacuees leave their hotel lodging.

The effect of the hurricanes was documented even at the brand level. The Accor Group, which owns two limited service hotels, Motel 6 and Red Roof Inn, wrote in its fourth quarter earnings press release that Texas had faster growth in RevPAR compared to other states in which the company has hotel holdings. The La Quinta Corporation announced in its third quarter earnings press release that occupancies in its hotels in September and October were very strong due for the most part to Hurricane Katrina and Hurricane Rita. La Quinta Hotels and Motel 6 are limited-service hotel leaders in Dallas and Houston in terms of number of rooms. 

It has been proven that the demand for hotel rooms in the Texas markets became inflated after Hurricane Katrina and Hurricane Rita, but does that demand growth have staying power in the upcoming quarters? FEMA has agreed to extensions for about 20,000 evacuees through February 13 or March 1, so for markets which are still saturated with evacuees, the party may last one quarter longer. Hotel demand in Texas will not crash and burn, but 1,000 basis point changes in occupancy and 25 percent year-over-year increases in RevPAR cannot last. There are signs that the hotel industry in these markets will remain in the recovery mode in which they were prior to the hurricanes. Houston is poised to receive some of the convention center demand overflow from New Orleans that will help to keep its hotel market growing.  Fort Worth, despite a decline in air traffic for a major airline, Delta Airlines, the outlook is positive for increasing airport traffic, which is good news for the hotels in the area. The declines, although eminent, may be tempered a bit thanks in part to increased tourism and business travel.

Despite the fact that the hotels in these markets in the end may not come out on top, the metropolitans themselves may benefit from evacuees settling down and making permanent residencies in the markets. The economy in Dallas continues to improve, which may provide jobs to those looking to land there, and Austin remains a very desirable place to live. In terms of employment growth, Houston did see impressive gains in 2005 compared to 2004. Between August and December 2005 employment grew in Houston by 0.7 percent compared to 0.3 percent during the same time period in 2004. This could mean that some of the evacuees who found temporary housing in the hotels in Houston have made the city their long-term residence and now that the subsidy is being removed they are likely move out of the hotels and make more permanent living situations. Although the hotel demand growth may not have staying power, the inhabitants of the hotels might.

Abigail Marks is an economist with Torto Wheaton Research in Boston.

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