Caribbean Hotel Market Update

Caribbean Hotel Market Update

Senior Valuation Surveyor
Turks & Caicos Islands

Operating out of 13 offices throughout the Caribbean territory and Latin America, BCQS International has a wealth of expert knowledge and a unique insight into the region’s hospitality sector. As market leaders and the most established RICS regulated surveying firm in the Caribbean, we’ve been providing specialist valuation, cost management, construction and project management services to a host of clients within the hospitality sector for over 50 years. Having consulted with market participants across the Caribbean, we set out a review of both the immediate impact and potential future challenges facing the region’s hotel sector in the wake of the COVID-19 pandemic.

2019’s Record Year Review

From a performance standpoint, 2019 represented a record year for the Caribbean hotel sector. An achievement even more impressive given its proximity to Hurricane Irma and Maria in 2017, at which time severe business disruption and physical damage was sustained to many parts of the region. This disruption and damage continued to impact trade well into Q1 2018 and beyond for the worst affected areas. Within Table 1 below, we further illustrate the impressive year on year comparisons in performance between 2018 and 2019 across all hotel key performance indicators (KPI) and business metrics.

As per Table 1 below, there was a strong year on year performance across hotel KPIs within the Caribbean, with only hotel occupancies seeing a decline against the previous year of -2.7%. However, this occupancy decline was offset by the significant 5.6% Average Daily Rate (ADR) growth, which subsequently bolstered overall RevPAR (Revenue Per Available Room) performance to achieve its 2.8% growth for the year. From a Caribbean perspective, as a generally high-tier tourism market, there is far greater prioritization to drive ADR than managerial attempts to increase hotel occupancies. Rate growth is crucial in a market dominated by upscale, upper-upscale and luxury resorts, all of which strive to offer exceptional customer experiences, amenities, and sense of exclusivity for which guests are willing to pay premium rates.

This record year for Caribbean hotel performance was no more prevalent than here in the Turks and Caicos Islands. As illustrated in Table 2 below, growth across all KPIs and business metrics in 2019 was evident, with ADR performance particularly impressive. It was the only Caribbean participant to exceed an ADR of one thousand US dollars. Displaying double digit growth across both hotel RevPAR and hotel revenues, the Turks and Caicos Islands further demonstrates itself as a maturing market and truly a premium holiday destination within the Caribbean region.

With supply growth modest at 0.5%, and strong demand growth of 4.7%, 2019’s performance supports the view that the Turks and Caicos Islands remain a location for opportunistic development and growth potential within the Caribbean hospitality sector. Figures in Table 2 suggest that  from this historic  data, new hotel supply would be well absorbed within the market and as evidenced by the ongoing construction of Rock House by Grace Bay Resorts and Ritz Carlton Turks and Caicos in Providenciales. The current challenges relating to the current COVID-19 pandemic will however at least in the short term, have an impact on this market which is currently difficult to quantify.

Unprecedented Turbulent Winds

As a region prone to destructive storms, the Caribbean has demonstrated its resilience and resolve numerous times during adverse conditions. We need to look back only as far as September 2017 when a substantial swathe of the Caribbean was decimated by two back to back Category 5 hurricanes (Irma and Maria). With the fatalities from these storms reaching into the hundreds, subsequent reports indicated that as much as 85% of property and infrastructure across islands were destroyed, with locations such as the British Virgin Islands, Saint Martin, Sint Maarten, Antigua & Barbuda severely affected.

As we move forward to the present day, the threat to the region comes in a very different form, as the COVID-19 pandemic now appears to have inflicted another mighty blow to our hospitality sector. However, unlike the hurricanes of old, the virus’s path of destruction has been far wider spread as it continues to infiltrate international borders, inflicting substantial levels of operational disruption and, in some cases, irrevocable business damage to many sectors of the global economy. The extent of this damage is yet to be fully realized or understood, and the duration of disruption remains widely unknown with ongoing concurs about future waves, Some countries are now back to a degree of normality including a number of those who were first affected. Some merging and notable gains are being seen in the hotel sector which provides a useful indication for those who are someway behind the curve, as to how the market is likely to respond and recover.

With the arrival of 2020, a notable downturn in global hotel performance was seen. According to STR data, throughout January and February, the Caribbean region was already outputting year on year declines in both occupancy and ADR performance of approximately -5% and -1.5%, respectively. This decline was not a result of COVID-19, but more a loss in momentum when compared to 2019’s impressive performance at the beginning of the year. By the end of March 2020, a quarter on quarter review revealed that the Caribbean had experienced a -20.6% in hotel occupancy, -3% in ADR and -23% in RevPAR.

Operational repercussions of COVID-19 were delayed in the Caribbean compared to that experienced in markets such as Asia and EMEA, the former of which felt significant occupancy declines at the beginning of February. Generally, the impact was evident within the third and final weeks of March for the Caribbean region. From these final weeks of March through to the second week of April, Caribbean occupancy rates plummeted and were unable to even reach double digit figures. By the second week of April, the region collectively achieved an occupancy rate of only 7%, during which time its RevPAR also declined by a staggering 95% year on year.

With such substantial declines being recorded in both Caribbean and global operational performance, hotels became simply incapable of operating efficiently. Overheads and general expenses associated with opening hotels and adequality staffing them, would in most cases, significantly exceed revenue generation capabilities in such dire market conditions.

Such a challenging landscape within the hotel sector has inevitably led to countless difficult operational decisions for hotel owners and management. With the ongoing development and spread of the virus and the closure of country borders, we have seen an increasing level of hotel closures as well as thousands of employees losing their jobs within the industry worldwide. From a Caribbean perspective, this is increasingly concerning due to the region’s heavy reliance on the tourism industry as a key source of both its GDP contribution and domestic employment.

Within the most recent statistics published by the World Travel & Tourism Council (2019), 13.9% of the Caribbean’s GDP was attributed to travel and tourism. However, this contribution to GDP significantly varies on a territory by territory basis, reaching upward of 90% in some islands. Many islands including Cayman, Trinidad, Jamaica and the British Virgin Islands have a far more diverse economy, each with strong alternative industries such as manufacturing, financial / professional services and mining capabilities to name a few. However, the Turks and Caicos does not possess such a varied economy and consequently remains one of the most travel and tourism dependent locations for GDP contribution, not only within the Caribbean, but globally.

Key Challenges Moving Forward

Owners and Operators – Unlike many international markets, the Caribbean does not possess strong domestic demand for hotels. As a region characterized by predominantly high-end hotel and resort developments, conceptually these products are not designed, nor priced to cater to the local market, but rather wealthy, international leisure-based guests. Consequently, the region cannot depend on a gradual recovery coming in the form of ‘staycations’, which many other drive-to global markets are able to leverage until international-based demand returns.

Even as we fast forward to a time where international travel resumes, hotel owners and their management teams in the Caribbean are set to face increasing operational impasses when it comes to decisions on when/ if to reopen and indeed, what a reopening will look like. This will initially be dictated by the reopening of borders, following which there will be many challenges in relation to how best and efficiently operate in adapting resort amenities / services to accommodate defined social distancing measures for both guest and employee safety. These new  measures must all be carefully considered whilst also calculating how such operations can deliver essential profitability to the business.

Shifts in Consumer Behavior – In addition to governmental influence within the hospitality sector, tourists themselves will inevitably have enhanced levels of sanitary expectations and risk perception when booking trips in at least the short to medium-term. Such expectations will most likely extend from the moment they leave their home until the point they return. Consequently, hotels will need to work in greater collaboration with staff, suppliers, air/ cruise lines and ports, and so forth to ensure they can provide their guests with the necessary safety assurances.

Industry adaptation and advanced initiatives are responsibly being undertaken by several large international hotel companies, who are working closely with medical associations to adopt new and the safest measures within their properties as early as possible. There are, of course, hotels that have played a key role in accommodating essential workers and medical professionals during this pandemic. Such properties are in somewhat of an advantageous position, having already been operational in these times and needing to demonstrate the highest standards of cleanliness for these workers on a daily basis.

Financing Within Hospitality

More locally, within the Caribbean, we are seeing continued support from the traditional high street lenders in the market for those who qualify. Whilst risk perception within the hospitality industry has heightened, certainly in the short-term, experienced lenders remain proactive and supportive of the sector. We spoke with several active lenders in the Caribbean hotel sector who indicated they’re continuing to work in partnership with their customers, endeavouring to provide as much assistance as possible with alternative lines of credit and short-term facilities.

Recovery – A Look Into The Future?

Much of the focus for owners and operators today surrounds day to day operational changes and associated costs with hotels reopening in this post-COVID environment. Generally, whilst industry specialists feel that although more extensive protocols and sanitation equipment costs can be effectively absorbed and managed within their business, there is still an inability to accurately understand and resource this impact. This uncertainty is likely to continue until a time where new government led initiatives and guidelines are clearly defined within the industry.

From a broader economic standpoint, central banks remain key to administering the much-needed liquidity into global economies. With varying forms of government support initiatives being provided in the form of various stimulus packages or employment furlough schemes, these central banks have been buying significant levels of government debt. Consequently, due to such heavy reliance on borrowing, it is likely that interest rates will remain low, certainly in the short-term, until greater economic stability prevails.

In addition to contemplating what is commonly being referred to as the ‘new normal’, many now look to the future with uncertainly and questions surrounding employment, cost of living and what the implications such significant debt provisions may have on future inflation rates.

2020 – A Game of Two Halves?

Here in the Turks and Caicos, we are however beginning to see some encouraging progress made to regenerate and kick-start the local tourism sector. After imposing strict quarantine measures from March, the Turks and Caicos have in general, been relatively successful in managing to contain and avoid the significant spread of COVID-19.

Consequently, the island’s government has put into place plans to reopen the international airport, currently proposed for 22nd July, with multiple flights showing as being available from numerous US locations. A number of other countries have already opened up, including Antigua and Barbuda, The Bahamas, Jamaica, USVI and St Lucia.

Although the reopening of the island is certainly a positive step for the Turks and Caicos Islands, hotel owners and operators will now be mindful that the Caribbean region is heading into its annual hurricane season, which runs from June through to November. This period is typically characterized by reduced bookings and visitation levels to the region. This trend is evidenced within the graph below in which we’ve analyzed annual land-based arrivals (overnight stays) in the Turks and Caicos between 2012 and 2019. This data demonstrates a clear decline in these arrivals in September and, to an extent, October, which is typically the peak period for hurricane activity. A consistent rebound of increased visitation is then evident in November and December, which is largely influenced by peak holiday periods, including Thanksgiving and Christmas.

Consequently, and subject to no second wave of COVID-19, we foresee hotels targeting the greater demand during the Thanksgiving and Christmas holidays to capitalize on the much-needed lucrative business as we close out 2020.