Texas Hospitality Market Report
Texas Hospitality Market Overview
The Federal Reserve’s decision to cut interest rates in September is already impacting treasury and lending markets. Lower borrowing costs, combined with elevated cap rates for properties, are widening the spread between cap rates and the 10-year treasury yield. The yield spread on hotels, which had dropped to 420 basis points in October 2023, now stands at 540 basis points following the Fed’s rate cut. This 50-basis-point move is just the beginning of the cycle, but growing confidence that rates will continue to decline is likely to bring investors off the sidelines in the coming quarters. Additionally, lower costs associated with credit card spending will enable consumers to spend more on trips and vacations, boosting performance for Texas hotels.
Texas Submarkets
Houston
Market Overview
Occupancy in Houston rose by 27.9% landing at 72.7% compared to last year. All hotel classes in Houston demonstrated improved performance, with upper- & mid-properties showing the highest increases in occupancy. In comparison to the national ADR and RevPAR, which climbed at 2.3% and 3.9%, ADR and RevPAR in Houston did favorably, gaining 12.7% and 44.7%. Demand growth went up 28.9%, with supply growth at 0.8%. Major conferences and adverse weather conditions contributed to hotel performance. Room supply continues to grow with an average of around 2,000 rooms added annually. As of August, 2,200 rooms are currently under construction, primarily in the mid-tier class. 3,800 additional rooms are being planned for hotels in the Houston area, which suggests a strong pipeline for market expansion in the future.
Market Performance
The hotel industry has experienced a resurgence in the past year, driven by solid group demand and weekend travel. Group bookings have had a significant impact on hotel performance in Houston over the past year, with a 2.5% decline in group demand for upper-tier hotels in June. There is, however, an expected increase in group travel activity due to conventions and conferences coming from Dallas and Austin, since both cities will be undergoing renovations in the beginning of next year. 500 rooms are expected to be delivered in the second half of 2024 with 850 rooms set to open by the end of 2025.
Performance overall in Houston’s hospitality sector is expected to show growth. Year-end RevPAR results are anticipated to moderate but grow 3% due to lower ADR growing by 1% and flat occupancy growth. The market’s hotel performance will, potentially, remain steady in 2024 with, with a somewhat reduced performance reflecting changes in travel patterns and weaker economic growth, mirroring broader national trends.
Dallas-Fort Worth
Market Overview
The Dallas market remains a powerhouse for hotel performance. ADR has been unwaivered as operators have maintained a 5% growth rate throughout the year. Dallas is well-liked by both tourists and business travelers alike. The Dallas-Fort Worth Airport is one of the busiest in the country. Overall transit has seen a gradual 2.2% growth year to date, and group demand has remained relatively flat at about 1% growth. An increase in the number of rooms is also anticipated in the coming years with 4,500 rooms under construction and 3,000 additional rooms in the final stage of planning.
Market Performance
RevPAR growth in Dallas has stayed stable at around 4% to 5% with August at 3.0%. CSB/Market Center is expected to be the strongest submarket for hotel performance due to the high weekend transient demand and steady group demand. Renovations at the Kay Bailey Hutchinson Convention Center could limit some conferences and conventions. Dallas is projected to have a 2% RevPAR growth this year, expected to moderate in 2025. Despite renovations to the convention center, group travel will have a continued uptick along with further gains in international inbound travel. A key factor being monitored closely by potential buyers is the status of hotel maturing loans. As of August, 82 Dallas hotels properties have active CMBS loans, 42 of which are set to mature in the next two years. This may spur potential trade activity due to the Fed cut interest rates in September.
Austin
Market Overview
Austin has had a remarkable expansion in recent years, which has favorably impacted the hotel industry compared to other U.S. markets. The Austin Convention Center is undergoing a $1.6 billion expansion and redevelopment project, which is expected to shift the market come 2025 due to group travel. With construction underway, Austin’s meeting planners and hospitality providers are preparing to offer alternate spaces to accommodate conventions and conferences, to hopefully lessen the impact of closing the convention center. RevPAR performance accelerated 2.8% as ADR rose 0.3% and occupancy performed 3.1% above August last year.
Market Performance
Austin’s hotel market typically experiences slower progression during the summer. However, it is expected to improve in the coming autumn months. Occupancy during the weekdays among upper-tier hotels fell 2% indicating slower business travel, a common trend during the summer. Weekend occupancy also fell 2% to 67%, again a common trend for July. Hotter weather, a smaller university student population, and slower leisure travelers are the main factors of this slower progression.
There have been about 1,300 new hotel rooms delivered across 11 properties in Austin over the past 12 months, continuing several years of healthy growth in Austin’s supply. 51 properties are in the final planning stages, bringing an estimated 6,500 rooms, which will cause room growth to continue in the coming years. As for sales activity, Austin totals 11 trades. A higher interest rate environment tightening lending has made this number lower than the previous year’s. Texas is a non-disclosure state, limiting the amount of sales and price information to the public.
San Antonio
Market Overview
Recent data has revealed challenges and opportunities for San Antonio’s hospitality market. As of August, RevPAR declined 0.1%, however, ADR has maintained slight increases since April 2024, stabilizing at 0.7% growth and averaging $130 over the last 12 months. Occupancy composition has significantly evolved. Group bookings constitute about 22% of total occupancy from 2016 to 2019. These bookings averaged 15% in the past two years (2020 excluded), with a recent uptick to 17% year to date in June 2024. Over 600 new rooms will be delivered by 2026 in the Downtown/CBD area, with 410 opening in 2024 alone. Occupancy can potentially be impacted as demand adjusts to the approximately 2,000 new rooms added from projects planned for 2026-2028. Investments remain active with ten hotel trades occurring since the beginning of the year, primarily involving mid-tier hotels in Northeast and Northwest/Sea World submarkets.
Market Overview
Demand overall has moderated in recent years, with group demand declining by 8% last year, in contrast, transient demand increased by 3%. In construction, there is a significant growth and transformation of San Antonio’s hotel market. As of August, the city’s inventory has grown by 580 rooms thanks to the delivery of 4 new buildings throughout the previous 12 months. Ten properties with a combined capacity of 960 rooms are now under development. These new properties account for 1.9% of the market’s available inventory.
The 22% increase in room count compared to last year, with 1,097 rooms across eight new hotels, underscores San Antonio’s growing appeal to investors and developers. Growth indicates strong faith for San Antonio’s future as a destination. However it also raises questions on how the market can absorb new inventory and maintain healthy occupancy rates. Stakeholders will need to watch demand trends closely and potentially adjust strategies to ensure balance within the market as it expands.
