After emerging from the economic recession at the start of the decade as one of the strongest hotel market's in the country, Houston has experienced significant shifts in lodging fundamentals in recent years. The strength of the oil and gas industry from 2010 through much of 2014 led to record job and population growth, creating a construction boom across all real estate sectors. However, oil prices began to decline in late 2014, and Houston entered the worst energy downturn since the 1980s. Lodging fundamentals, although significantly influenced by the decline in energy-related demand, were not as severely affected as they were during the prior energy downturn, due in large part to a more diversified economy, most notably the growing healthcare sector, anchored by Texas Medical Center. While the price of oil has improved since reaching its nadir in early 2016, and indicators such as active rig counts and well production levels are improving, the timing and economic scope of recovery within the industry remain somewhat uncertain.
After robust growth early in the decade, Houston entered a period of decline, as fears of a global glut of oil reserves caused lower oil prices that forced major employers to freeze travel budgets and halt hiring and training activities. Lodging fundamentals were bolstered significantly in 2017 by two one-time events. Super Bowl LI lifted the annual average rate (ADR) by several dollars, and the aftermath of Hurricane Harvey brought an influx of demand from FEMA-related sources such as insurance adjusters, relief workers, and displaced residents. This demand, while strongest in the months immediately following the storm, remained in the market through the first quarter of 2018. While the comparison to these one-time events illustrates a fairly substantial RevPAR decline, as slight improvements in corporate demand levels did not offset the loss of FEMA-related and Super Bowl-related demand, the drop in occupancy and ADR had a lesser effect on valuations, as the spiked demand levels were never fully priced in to the market. The near-term outlook is relatively positive, as stronger economic growth and improvement in the energy sector should continue to bolster demand levels.
Record occupancy and ADR levels experienced through 2014 prompted a substantial increase in supply. Approximately 3,000 hotel rooms opened in the market in 2015, 5,400 rooms opened in 2016, 2,000 rooms opened in 2017, and 1,500 rooms opened in 2018. As of early 2019, another 900 rooms had already opened and another 1,300 rooms were under construction, with planned openings in 2019 and 2020. We note that the Downtown Houston submarket has realized the strongest increase, with three select-service hotels expected to open mid-year 2019. The greater hotel market will likely respond to the effects of this increase in supply over the next several years.
Transaction activity has slowed in recent years due to the decline in the oil and gas industry. While the total number of transactions increased in 2018, transaction activity declined by a total dollar amount due to uncertainty surrounding inflated demand levels related to Hurricane Harvey. A number of portfolio sales also contributed to the increase in transaction frequency in 2018. Of the roughly 20 hotel sales in 2018, the highest-priced sale on a per-key-basis was the TownePlace Suites by Marriott near the Galleria, at nearly $150,000 per room. The city's top submarkets for investors remain Downtown, Galleria, and Texas Medical Center.
* Although the HVI cannot tell you what a particular hotel is worth, it does provide excellent “big picture” data, indicating which market areas are experiencing positive trends, and thus may present good investment opportunities. The HVI for the U.S. is a measure of the strength of the lodging industry as a whole and, specifically, the hospitality investment market. The HVI for the various identified markets can provide a basis to evaluate and compare different geographic regions. For more insight on the limitations and applicability of the HVI, please read the message on the HVI home page by clicking on the graphic at the top of this page.