Houston’s lodging sector remains relatively strong, particularly with billions in petrochemical plants under construction in East Houston, expansions at the Texas Medical Center, last year’s opening of the Southwest Airlines International terminal at Hobby Airport and the 2016 NCAA Men’s Final Four. Next year Houston hosts the Super Bowl, which will further buoy the hospitality market. Where is the hotel sector headed? Realty News Report talked with CBRE Hotels Managing Director Randy McCaslin about the past, present and future of the lodging industry.
Realty News Report: How would you describe the state of the hotel market in Houston today?
Randy McCaslin: To understand the hotel market today, we need to put it into context. From 2011 through 2014, the oil boom fueled a rapid recovery for the lodging industry in Houston. There was very little new supply added, resulting in record high occupancies and RevPAR (revenue per available room) gains. Occupancy increased from 60% in 2011 to 72% in 2014 –10 points above the long-term average of 62%. RevPAR increases ranged from 10% to 14% during those four years compared to a long-term average of 4.5%. Typically, new supply is added to a market when occupancy exceeds 65% so you could say that new supply was overdue. The new hotels are needed additions to the Houston market. If not for the drop in oil prices, the new supply would simply ‘normalize’ the Houston lodging market, bringing occupancy and ADR (average daily rate) back down to more normal operating levels.
Realty News Report: What was citywide occupancy rate at year-end 2015? What about end of 2014? What were room rates?
Randy McCaslin: Occupancy peaked in 2014 and began to decline in 2015 in response to new supply and the oil price decline. In 2014, occupancy for Houston hotels was 72 percent and the average daily room rate was $107. Occupancy dipped to 68.5 percent in 2015, but ADR rose to $109. We are forecasting occupancy will decline 4 percentage points to 64.5% with an ADR or $106 this year.
Realty News Report: There seems to be quite a few hotels under construction in downtown Houston? Is the downtown market getting overbuilt?
Randy McCaslin: We estimate that approximately 8,000 new hotel rooms will be added to the Houston market between 2015 and 2020. Downtown Houston is going through a real estate construction boom with 5,000 new residential units, several new Class A office buildings, creation of a shopping district and the addition of new hotels. In the CBD, there is a desperate need for the new hotels, especially the Marriott Marquis that is expected to increase convention activity dramatically. Four new hotels are being added in 2016 with about 800 rooms. Two more with 1,200 rooms, including the Marriott Marquis will be added in 2017. There are several more planned but they could be delayed due to the oil price drop. There could be another 1,000 rooms added from 2018 to 2020. Downtown hit 73% occupancy in 2015, which is a record high. So with the new supply and increased demand, the market should remain strong.
Realty News Report: What about the proposed new hotel in the Galleria at the corner of Sage and West Alabama – the old Macy’s site? Will it fill a niche?
Randy McCaslin: Houston is deficient in luxury hotels. The two luxury hotels that exist –the St. Regis and Four Seasons — were built in the 1980s. There is a drastic need for more luxury hotels in Houston and a perfect location is adjacent to the Galleria. (Hotel Granduca is a boutique 120-room five-star hostelry in Uptown.)
Realty News Report: How will the new Galleria tower impact the two existing Westins in the Galleria? And the new Hyatt Regency, Hyatt Place and the JW Marriott?
Randy McCaslin: It will have a unique niche in the area. Occupancies reached 77% in the Galleria in 2015, so the market can certainly absorb more supply. The Westins will always do well because of their location within the Galleria. The price point of the new luxury hotel will be much higher than the Westins and have a minimal effect. The Hyatt Regency might be slightly affected due to its location and higher rates than the existing full-service hotels, but still its rates will be well below the luxury hotel rates.
Realty News Report: What about the Super Bowl next year? Will that have a big impact?
Randy McCaslin: Super Bowls typically raise the occupancy on an annual basis about two percentage points and increase rates about $5 to $10. Super Bowls are always wonderful to have but they only directly impact the hotel market for about two weeks. The long-term economic impact is the real benefit, providing support for the local economy and tremendous national marketing for Houston. The fact that it is occurring during the oil price decline is a real plus for the hotel market.
Realty News Report: The new 1,000-room Marriott Marquis is under construction downtown. Will that be enough to finally get Houston into the upper echelon of the U.S. convention industry?
Randy McCaslin: Yes. Houston has not been able to compete with cities its size for conventions because of the lack of an adequate number of hotel rooms downtown. With two 1,000-plus-room convention hotels attached to the George R. Brown Convention Center, the city will be able to compete for the larger conventions. Also, with the addition of the Homewood Suites/Hampton Inn that just opened adjacent to the convention center plus the Hilton Americas, Embassy Suites and Westin, Houston will be able to house a 3,000 person convention within a three block radius of the convention center.
Realty News Report: What about CBRE’s new efforts in the hospitality sector? Why now?
Randy McCaslin: CBRE wants to be the number one hotel real estate firm in the world. It already had hotel-related appraisal, debt/equity and capital markets professionals but it did not have consulting. By adding PKF Consulting, it can now offer a complete package of services to the hotel industry under the name CBRE Hotels. No other firm has CBRE Hotels capabilities.
Realty News Report: Finally, the elephant in the room: What about the downturn in the energy industry. How will that affect hotels and occupancy?
Randy McCaslin: The drop in oil prices was obviously not expected, especially the recent decline to $30 per barrel. The large layoffs and cutbacks in travel and trainings/meetings by the energy industry have had a significant effect on the market. The combination of new supply and decreased demand are expected to cause three years of negative RevPAR and a 9-point drop in occupancy to about 63% by 2017. However, Houstonians know that the oil price drop is temporary; it is simply the nature of the industry. We expect oil prices to stabilize in 2017 and 2018 and then get back on track in 2019 and 2020, resulting in a rebound of about four points in occupancy –back to 67% by 2020 — which is still five points above the long-term average. So Houston will end up with a strong hotel market and benefit from the new hotels.
April 23, 2016
Realty News Report is a Texas-based publication edited by Ralph Bivins.