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Recovery – and risks – in the Caribbean in 2018

Following a relatively flat year for the Caribbean hospitality market — prior to the catastrophic storms that slammed the region in September — all eyes are focused on what the new year will bring as the region continues its recovery, shifting consumer demands reshape the travel landscape and fears of oversupply creep in.

Looking back at 2017, the Caribbean hospitality market had mixed hotel performance and modest growth in tourist arrivals. More specifically, we have interpolated that without the effects of the hurricanes, growth in arrivals to the region (not including Mexico) should be about 4.2% for 2017, or slightly over 900,000 additional arrivals to the top 15 markets, based on data from the Caribbean Tourism Association through October. At the same time, however, hotel occupancy in these markets was actually down 0.42% and ADR was up by only 1.42% year to date through October.

Momentarily ignoring the short-term effects of the hurricanes, let’s review the key factors behind the flat hotel metrics when compared with continuing growth in arrivals to the Caribbean:

  • Sharply increasing supply:  The total number of hotel rooms in the Caribbean (excluding Mexico) has increased to about 249,000 as of 4Q 2015, according to STR, representing 9% growth in just two years. This compares with 12.7% growth in five years. The implied number of room nights sold based on reported occupancy rates suggest growth in demand of about 11.9% over the same five-year period, which is slightly slower than supply. The highest ratio of demand to supply occurred in 2015, and this ratio has been slightly declining since.
  • Greater use of non-traditional accommodations: Airbnb is affecting occupancy rates at traditional hotels, as is increasing usage of villa homes and condominiums. As the number of higher-income earning families that travel together increases, use of these larger accommodation units also rises.
  • Increasing travel to Cuba: Although U.S. travel to Cuba has grown tremendously over the past five years, Americans still make up a small percentage of the overall tourism market. And despite the recent reversal of the relaxed travel rules for Americans visiting Cuba, 4.7 million stay-over visitors are expected in 2017, or about 11.9% growth over 2016. The majority of travelers to Cuba are from Canada and Europe, which makes up a minority of the market for most of the remainder of the Caribbean; however, the shifting of these travel habits can affect overall regional hotel performance. The majority of hotels in Cuba do not report hotel statistics, and only a few recently began doing so. 

Hurricane damage

Some of the biggest tourism destinations in the region were affected by Hurricanes Irma and Maria. Not only is Puerto Rico, which had a number of hotel closures, a massive tourism market, other popular destinations including St. Maarten/St. Martin, Anguilla, St. Barth and Dominica, as well as both the U.S. and British Virgin Islands, all were impacted. We estimate a temporary reduction in supply of about 5,000 rooms for at least the immediate tourist season (December to April 2018). Unfortunately, the public perception of the condition of these islands may further reduce demand in 2018. On the plus side, other Caribbean destinations stand to benefit from these losses.

However, the biggest question about the Caribbean hospitality market is: Are we over-building? The number of hotel rooms in the active development pipeline (excluding Mexico) has risen to 18,063 — up 70% since December 2016. While Jamaica and the Dominican Republic have by far the most hotel rooms in the active pipeline (nearly 7,000 rooms combined), the destination increasing its existing supply by the highest percentage is St. Lucia (over 25%). It is also interesting to note St. Lucia’s ADR declined nearly 15% in the last 12 months over the prior annual period and occupancy declined over 7%.

For the Caribbean overall, there were about 96 stayover arrivals per hotel room in 2016. Therefore, in order to serve the increased supply in the next two years, arrivals will have to increase by over 1.7 million (7.3%), not including Cuba, which is significantly stronger than 2017 growth. In addition, an increase of 18,063 rooms translates into a needed increase in room nights sold of over 4.4 million, or an increase of 1.6 million visitors (using an average of two persons per room and a 5.5-night stay per visit). Although the adage “build it and they will come” may work to a certain extent, developers, investors and lenders should proceed with caution as the potential for an oversupply in the next three to five years looms.

 


 James Andrews is senior managing director of Integra Realty Resources. He manages the company’s Caribbean offices and is based in the Cayman Islands. 

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