As the kickoff of the World Cup has begun, all eyes are on Brazil. With an expected 600,000 tourists converging on the 12 host cities of São Paulo, Rio de Janeiro, Curitiba, Porto Alegre, Belo Horizonte, Cuiaba, Brasilia, Salvador, Recife, Natal, Fortaleza and Manaus, the question remains what will happen to the lodging industry once the World Cup is over?
Domestic and international hoteliers have embraced the vast quantity of tourists arriving in Brazil, along with exorbitant room rate increases – a 120% YTD spike in World Cup host cities compared with last year, according to Tripadvisor. The largest hike has been seen in Rio, where the average daily rate has already doubled, averaging $445 per night. These rates are anticipated to be 50% higher than those forecasted for the 2016 Rio Olympics, which are established and capped by the International Olympic Committee.
This comes as no great surprise. Prices always spike when major world events drive demand, and Brazil has shown positive signs of growth as an international travel destination. The Brazilian Tourism Board has in fact reported that improvements in infrastructure and the standards of hotels will increase demand and accessibility to the many of Brazil’s World Cup host cities, and that the country received 5.7 million visitors in 2013 compared with 4.8 million in 2009.
While the country also experienced a tepid supply growth rate (CAGR) of 1% between 2008 and 2014, there are reportedly several hotels in the planning stages and under contract representing a potential increase of 21%; of which nearly 24,000 rooms are anticipated to open in 2015. This new supply consists primarily of economy, midscale and upper-midscale hotels and resorts intended to meet the needs of business and leisure travelers.
But what goes up must come down, and so very well might rates and occupancy levels. This correction has the potential to arrive at the worst possible time as many anticipate a post-World Cup recession in Brazil. This could leave hoteliers facing the “double whammy” of having advanced new construction at the top of the market and while land and construction costs are sky high. Further, they’d now be operating hotels in an oversaturated market during a contraction in the economy with resorts built for the international traveler instead of the Brazilian vacationer — the most frequent user of the country’s lodging and hotel sector.
Previous World Cup host nations provide useful benchmarks for comparison and analysis. For example, leading up to the 2010 tournament, South Africa experienced a significant increase in room supply growing from 48,000 rooms in 2007 to 58,000 in 2010, representing a CAGR of 6.5%. This relatively high increase in supply, combined with the global economic downturn had a direct effect on occupancy levels as they dropped from 72% to 53% in the same period. Nonetheless, demand has remained relatively strong since the end of the South Africa World Cup. Occupancy levels have rebounded to 56.5% in 2012, while 2014 is projected to finish at 62%.
With the 2014 World Cup underway, primary cities such as São Paolo and Rio de Janeiro are already seen as the big winners with occupancies expected to remain around 90% for the remainder of the tournament. Even secondary and tertiary markets are expected to experience strong demand.
Although the month long event will allow the host cities and some local tourism destinations to thrive, once the World Cup is complete the lodging industry may experience an overall decline in RevPAR. The euphoria will subside, and as many economists have predicted, Brazil is likely to slide into an economic slowdown impacting domestic and leisure travel. In addition, while many of the new hotels under the planning stages may never get built due to cumbersome bureaucracy and lack of financing, there is a potential oversupply problem lingering in particular within secondary markets like Manaus, Fortaleza and Natal.
Contributed by Embree “Chuck” Bedsole, managing director and global leader, hospitality and leisure advisory services group at Alvarez & Marsal, New York City.