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On The Upswing?

Houston Market Sees Short-Term Boost Following Harvey But Long-Term Impact Is Still Unknown

Thursday, October 26, 2017
Dennis Nessler
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Often times I’ll ask a hotel executive to give me a sense of what they see ahead for the lodging industry, particularly in terms of RevPAR growth, and nearly just as often they will utter the phrase ‘it’s a market-by-market proposition.’ In other words, it’s difficult to make any sweeping statements such as “the cycle is nearing the end” or “supply is becoming an issue” for the industry from a macro perspective. There are, in fact, many smaller pictures within the bigger picture.

There is probably no better example of this than Houston, a city that admittedly has more important things to contend with right now than how its hotels are performing in the wake of the devastating effects of Hurricane Harvey. Nevertheless, just how things play out for the lodging market in Houston could have major implications on the overall financial health of the city moving forward.

Impacted dramatically by the energy downturn—specifically a sharp decline in oil prices—the fourth largest city in the U.S. has been an outlier among the top 25 MSAs over the last several years. While other major markets have been reaping the benefits of RevPAR increases in the mid to high single-digits, not to mention soaring occupancy, Houston has struggled mightily.

Hotel activity declined in the market at the end of ‘15 and throughout ‘16. According to STR, the four quarter average for occupancy reached a low of 62.3 percent in Q4 2016, a significant dip from the peak of 72.0 percent in Q4 2014. Meanwhile, RevPAR declined by $11.74 during this same period from $77.06 to $65.32. STR further reported that average room rates declined from $106.88 in Q4 2014 to $104.45 in 4Q 2016.

More recently, RevPAR has declined 4.6 percent year-to-date, which is on the heels of a 12.5 percent drop last year and a 3.4 percent decline during 2015, according to STR. In addition, for the first seven months of the year, occupancy averaged just 62.7 percent, making it the lowest of the top 25 U.S. markets. These numbers are far worse than what was originally forecast for the market for this year.

As we speak, city hotels are filled by the influx of emergency workers, insurance adjusters and others dealing with the hurricane’s impact, which is good news for the time being. But the big question is exactly what will last month’s hurricane mean for the city from a hotel standpoint long term, if anything?

Of course, you always worry about price gouging and there’s always going to be a few hotels that look to take advantage of the situation and desperation of guests by raising rates. But that is generally offset by many more properties that are offering deeply discounted rates to emergency workers and to assist with the housing crisis.

Here’s some of the recent data. Occupancy spiked immediately after Harvey made landfall, from a low of 41.4 percent on Aug. 25—which is likely the result of room cancellations in anticipation of the storm—to 90.4 percent on September 6, according to STR. Furthermore, from Sept. 3 to Sept. 9, occupancy ranged between 51 percent and 124 percent higher than occupancy during the same days in 2016. In addition, daily revenue related to lodging has nearly doubled from that of early August figures, according to the Houston Chronicle. (And that is despite the fact that the Texas Governor Greg Abbott suspended the state and local hotel and motel occupancy tax for relief effort personnel and storm victims.)

So the short-term impact has been obvious but what will it mean long term, if anything? There’s plenty of debate. Several owner/operators at a recent event told me effectively, “if you have a hotel in Houston, it’s going to do very well” for quite a while. However, plenty of industry research firms, such as STR, have suggested it will create more difficulties and challenges long-term despite the short term boost. For example, many hotels incurred costly damage and may struggle to get back up and running. In addition, some have suggested the nearby drive-to markets, such as Austin, for example, may see the greatest benefit, or so to speak, as a result of the housing crisis created by the storm.

As you can see, there’s plenty of debate on how this will play out for the city of Houston, but there’s no debating the importance of the recovery of that market to the overall health of the lodging industry, not to mention the entire country right now.

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Dennis Nessler    Dennis Nessler
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