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How Long Can Houston's Hotel Industry Enjoy The Lap Of Luxury?

As Demand After Hurricane Harvey Eases, Houston's High-End Hotels Are Poised For Growth
July 10, 2018
The Rosewood Hotel, scheduled to break ground late next year at 5000 Richmond Ave. in Houston.

Houston’s hotel sector got a shot in the arm in the aftermath of Hurricane Harvey. After 33 trillion gallons of water flooded tens of thousands of homes, Houstonians and aid workers encamped for months in the city's largely undamaged hotel stock, allowing it to emerge as the nation's strongest-growing lodging market.

"From a letter grade perspective, Houston’s hospitality sector is about as good as it gets" in terms of demand, said Lauro Ferroni, commercial real estate services provider Jones Lang LaSalle's director of research for Hotels & Hospitality.

Now, almost a year after Harvey, the sector is bracing for a new flood: luxury hotels.

Between Thompson Hotels at The Allen, the Equinox Hotel at River Oaks District, W Hotels Downtown, the recently announced Rosewood and other high-end properties, Houston’s luxury hotel market is poised for growth.

"Houston definitely is kind of light on luxury hotels when you compare Houston to Dallas or other similar areas," said CBRE Vice President Michael Yu. Yu, along with business partner Rahul Bijlani, run CBRE’s Hotels operation in Houston. Of all Houston’s hotels, only eight are classified as luxury, according to CBRE’s Director of Hotel consulting Jeff Binford.

Jones Lang LaSalle found that among the 15 top lodging markets in the country, Houston has about half the share of luxury hotel rooms than those other markets on average.

"It’s a time for developers and investors to ask why Houston hasn’t had that quality and stock built" in terms of luxury, Ferroni said.

The challenge for Houston’s luxury hotels is that fundamentally, the city is a business travel market, Yu told CoStar. On weeknights, hotel owners can charge a healthy rate in Houston, but come the weekend, the hotels are nearly empty. That uneven cash flow makes it more difficult for luxury hotel developers to find financing to build, he said.

But that's changing. Tilman Fertitta’s new Post Oak Hotel is the latest sign that Houston’s luxury market may be a sleeping giant.

"Houston is one of the areas where wealth is in abundance, certain industries create that wealth," Binford said. Houston also attracts wealth. International shoppers have been a staple in Houston, and that segment is growing. Wealthy individuals from Mexico and other South American nations see Houston’s robust high-end retail scene as a shopping destination.

Two other major factors are drawing luxury hoteliers to Houston, analysts say. Texas’ largest city has a strong market for banquets and social gatherings at hotels. When investors are underwriting these projects, they’re not just looking at group bookings or travel. Part of Houston’s hospitality strength is the local social market including galas, conferences and other events.

Houston's meeting spaces produce some of the strongest revenue per square foot in the country, according to Yu. Luxury hoteliers are also keen on the fact that profit margins in Houston and Texas benefit from relatively low labor costs and few unions and related work restrictions.

Now analysts are struggling to calculate how the easing of demand after Harvey and the added supply of hotel rooms will play out for the hotel industry in Houston in coming years. "Because of Hurricane Harvey’s disruption, everything is fuzzy in Houston," Binford said.

Prior to Hurricane Harvey, Houston’s hotel occupancy declined for 31 consecutive months, with average daily rates declining 21 of those 31 months. Harvey was a jolt to Houston’s hospitality industry. According to Smith Travel Research, in the 28 days ended Sept. 16, Houston’s hotel occupancy increased 31 percent and average daily rental rates were up 11 percent, resulting in revenue per available room growth of 45 percent.

Long-term effects from the storm will take time to understand, but looking at previous disasters offers insight. Hurricane Katrina, a Category 5 storm in 2005, destroyed or made uninhabitable an estimated 300,000 homes around New Orleans while Superstorm Sandy inundated almost 90,000 buildings in New York City alone in 2012.

Examining revenue per available room growth for the five years post Hurricane Katrina and Superstorm Sandy, Jones Lang LaSalle found that this statistic spikes in the year in which the natural disaster strikes, while turning negative or leveling off to more normalized growth levels the year after.

Locally, Houston has been digesting a sharp increase in room supply, complicating matters. About 3,000 hotel rooms opened in the market in 2015, 5,400 rooms became available in 2016, and 2,400 rooms opened in 2017. As of early 2018, another 700 rooms had already opened and another 2,200 rooms were under construction, with planned openings in 2018 and 2019. The Houston hotel market will probably experience the effects of this increase in supply over the next several years.

Even with those supply concerns as post-Harvey demand slows, analysts say the city should be able to absorb the added hotel room supply.

"We will likely see a year-over-year decline because of Harvey, but overall we’re at the beginning of recovery," Yu said. "The next two years are going to be pretty good years for Houston’s hotel market."

Kyle Hagerty, Houston Reporter  CoStar Group   
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