Houston was one of the strongest hotel market's in the country as the region emerged from the economic recession early in 2010, bolstered by growth in the energy sector and a favorable business environment that led to record job and population growth. Such growth led to increased construction 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 affected as in the prior energy downturn, due in large part to a more diversified economy, most notably the growing health care sector anchored by Texas Medical Center. The price of oil reached its nadir in early 2016, after nearly 18 months of decline. The outlook for the gas and oil industry would best be described as cautiously optimistic given the positive economic indicators, such as rising oil prices and active rig counts.
After robust growth early in the decade, Houston entered a period of decline, as the oil and gas industry was faced with challenges related to oversupply, which particularly affected submarkets with high exposure to energy-related corporate demand. This trend would likely have continued in 2017 had it not been for the impact of two one-time events. Until Hurricane Harvey made landfall at the end of August, RevPAR had declined each month, except for February because of Super Bowl LI. Occupancy and average rate (ADR) increased substantially in the last four months of 2017 given the increased demand levels from displaced residents, insurance adjusters, and other FEMA-related sources. As a result, occupancy improved to the mid-to-high 60s, and ADR increased roughly $3 in 2017. The near-term outlook is relatively positive, as stronger economic growth and relative stability in the energy sector should help somewhat offset the comparisons to non-repeating events in 2017.
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, 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. We note that the Downtown Houston submarket has realized the strongest increase. The greater hotel market will likely notice the effects of this increase in supply over the next several years.
Transaction activity was relatively slow in 2015, 2016, and 2017. It is expected to remain low in 2018 due to the continued uncertainty in the energy sector and caution regarding recently inflated demand levels from Hurricane Harvey. There have been approximately 35 hotels sold since January 2017, including the DoubleTree by Hilton Greenway Plaza ($60,000,000 or $155,000 per room) and the Staybridge Suites Houston Medical Center ($21,600,000 or $180,000 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.