DFW Hotel Sector Went From Booming To Bleeding. Recovery Could Be A Year Away.

The Dallas-Fort Worth hotel industry went belly up in a matter of weeks as the coronavirus pandemic interrupted hotel construction and deflated occupancy rates across the market.

“At the beginning of this year, so many of our hotels were saying this is going to be a great year," Hotel Association of North Texas Executive Traci Mayer told Bisnow. "It’s a banner year for us [they said]. It was [a year] of excitement and just with this one event, it has changed everything."

Entering 2020, DFW's average hotel occupancy rate hovered in the 60%-plus range, and the market seemed braced for another year of growth, Mayer said.

But the robust hotel sector fell into a deep abyss after the coronavirus pandemic forced social distancing measures and massive shutdowns in mid-March. After the pandemic hit the local economy, DFW's hotel occupancy rate plummeted more than 40% to the 20%-range in a matter of weeks, according to Mayer. 

Full-service DFW hotels fared even worse, with some reporting single-digit occupancy rates in recent weeks, Mayer said. 

Unfortunately, for DFW hotel operators and financiers, the economic shock from the coronavirus pandemic interrupted a half decade of positive growth, and it did so with no warning. 

"We have to remember the economy was on solid footing heading into the pandemic, leisure and hospitality employment grew by 5% in 2019, adding 19,000 jobs in Dallas-Fort Worth," CoStar Group Director of Market Analytics Paul Hendershot said. 

DFW hotels even penciled in 2020 as a year of solid growth until they ended up battling declining room rates week-to-week. It will now take at least several months for the sector to recover, analysts say. 

“We are hoping that we will gain back the [pre-coronavirus] occupancy [levels] by the beginning of next year, or at least get a good foothold," Mayer said.

What had been a relatively strong hotel development and acquisition cycle in DFW also needs some time to heal. Until the first quarter of 2020, hotel acquisition activity in DFW outpaced prior year levels for four consecutive quarters, CBRE Hotel Advisory Director Jeff Binford said.

The region's construction pipeline also remained solid until the pandemic broke out. 

"In terms of development, from 2015-2019, hotel supply increased at a compounded annual growth rate of 3.8% and with strong increases in 2018 and 2019, coming off record high occupancy in 2017," Binford said. "From 2019 through 2024, we were forecasting an increase of 3.2% compounded annually before COVID-19."

With the pandemic disrupting everything from construction financing to hotel occupancy, CBRE's projected growth rate for DFW hotels from 2019 through 2024 has fallen to a more modest 2.8% compounded annually. 

This disruption in hotel construction took effect as soon as the coronavirus pandemic reached alarming levels in March. Prior to March, 43 DFW hotel construction projects with 6,500 rooms were planned for groundbreaking in 2020, CoStar's Hendershot said. 

As of late April, at least five of those projects have been postponed for a few months. 

What happens to hotel construction projects over the next year or two depends on the situation surrounding each individual asset, analysts say. 

"Some hotels are closing permanently," Binford said. "Hotels under construction and opening soon may perform well with fewer rooms in the market. Those in planning stages — not yet financed — will likely be delayed due to lack of available liquidity in the debt markets."

This market-wide disruption in construction impacts more than just hotels.

“The projects that broke ground prior to the shelter-in-place [orders], they have continued the process," Dowdle Real Estate founder and President Lynn Dowdle said. "But most of the other projects went on hold. What that means is it is hard on the general contractor, it’s hard on the subcontractors … it’s a trickle-down effect.”

Hotel financing is another area of concern with low occupancy rates and minimal cash flow making underwriting hotel acquisitions and new builds in DFW virtually impossible right now. 

"How do you underwrite zero occupancy and for how long?" 3650 REIT founder and managing partner Toby Cobb asked. While Cobb said he believes hotels long-term remain a solid asset class, in the short-term, his hotel lending and financing firm believes it will be difficult to secure capital for new deals in this disrupted market. 

“How would we underwrite a hotel owned in today's environment? With a year or more of interest reserve in place," he said. "And it would be an extremely conservative basis going in, because we just don’t know how long it is going to take for us to return to some level of normalcy with respect to hospitality assets.”

Cobb does believe hotel owners who are responsible in working with their lenders and existing capital to keep operations and monthly payments going will face a positive future as soon as the crisis clears.  

"I don’t believe this is going to dramatically change the asset class in the long run," Cobb said. "We believe people will return to travel. We believe people will return to staying at hotels with first-class sponsorship and management."