The Boom And The Gloom: Houston’s Hotel Market Is Overbuilding

Houston is grappling with a hotel supply glut. Hospitality inventory has increased from about 72,000 rooms in 2010 to 92,000 rooms, a 28% leap, according to Houston-based hotel consulting firm DPC Hospitality.   

The construction pipeline is still packed with more than 4,500 units expected to be delivered this year, JLL reports. Houston is ranked as the fifth U.S. market for most hotel product under construction. 

As a result of market saturation, lowered occupancy rates and depressed rental prices, assets in Houston are becoming increasingly distressed, CBRE Senior Vice President Rahul Bijlani said. That distress is piquing investors' attention.

Hotel Industry Shocked By Downturn  

As the price of oil peaked above $100 a barrel in the early part of the decade, hotel developers responded by building more hotels in Houston. Then in late 2014, the oil market plummeted, cutting business travel and bringing the need for additional rooms down with it. 

As those new units were added in the years to follow, business for many energy-related companies — a big driver for the hotel and office market in Houston — rolled back. 

In late August 2017, Hurricane Harvey poured down on Houston, which provided an unfortunate, but momentarily strong boost to the hospitality industry. 

Excluding the post-Harvey demand, the revenue per available room, or RevPAR, a key performance metric in the hotel industry, has dipped since 2014. RevPAR dropped from $77.00 in 2014 to $66.50 in 2018, according to Smith Travel Research.

In 2016, the market noted a double-digital drop in RevPAR, which is linked to the oversupply of hotel rooms in Houston, Bijlani said. 

"Everyone is competing for the same business," Marcus & Millichap National Hospitality Group Director Andrew Frosch said. "The oversupply and competition are putting a big strain on the hotel owners to make a profit."  

If it wasn't for the hotel activity generated from Hurricane Harvey, there would have been a double-digit decline in RevPAR in 2017 and 2018. However, demand skyrocketed nearly 48% in the month following the storm when displaced residents and out-of-town recovery teams sought temporary housing, Bisnow previously reported. So far, RevPAR has been mostly flat this year.

"[Hurricane Harvey] was a very unfortunate event; a lot of us were impacted by it," Bijlani said. "But, a lot of hotels got saved from going back to the bank. The halo effect of Hurricane Harvey continued into the first quarter of 2018. Now that has started to fade some assets of Houston are having distressed assets in the hospitality space." 

Pain Leading To Investment Opportunity

A growing number of the underperforming properties are expected to change hands, Frosch said. A stumbling block there is a price gap between the buyers' and sellers' expectations. Many sellers value their hotels higher than what buyers are willing to pay. 

"Hotel values in Houston are depreciating," he said. "There is a good chance the values are less than they were built for." 

CBRE's Hotel Group is set to market a troubled property in the coming weeks. The recently constructed Marriott-brand hotel was built for about $11M, but the asking price will be about $8M, Bijlani said. 

"That represents a tragic turn of events for the ownership," he said. "But, it gives you an indication of the oversupply in the market."   

There is a diversity in the types of distressed properties in Houston, ranging in the submarket, quality level, capital type and brand name, Bijlani said. 

CBRE Hotel Group sold 11 hotels in Houston in 2018, including the Hyatt Place near Bush Intercontinental Airport, Hyatt House in the Energy Corridor, and the Holiday Inn Express & Suites Missouri City. The group has closed on two more hotels so far this year and is under contract for three more. 

Out-of-state and international investors are stepping in ready to purchase the troubled properties, New Horizons Hospitality President Aly Valiani said.

Valiani expects a sharp increase in distressed and foreclosed properties in the Houston market this year. In 2018, there were about eight foreclosed properties in Houston when the norm is one or two, he said. 

Long-term economic fundamentals are favorable for the overall Houston market. Positive job and population growth keeping investors bullish. 

In addition, the rental rates at the upper-tier hotels or "blue clip" brands are recovering faster than the lower-tier properties, which is validating investors' interest in Houston, Bijlani said. 

For example, Bijlani has noted overwhelming interest for a 25-property, corporate-owned La Quinta portfolio, which includes seven assets in Houston. 

"The new crop of investors that came in last year and this year are probably here for the long haul and will probably do very well," he said.