Hurricane Boosts Hotel Performance;  Supply Additions Bring Challenges

Robust pace of completions softens major metros’ occupancy. Texas hotels ended 2017 on a high note as residents displaced by Hur-ricane Harvey sought temporary housing, filling rooms across the state and boosting occupancy and RevPAR growth for the year. The state con-tains the largest pipeline for new supply, which will challenge the hotel market in 2018. Approximately 200 hotels are under construction, bring-ing nearly 23,800 rooms, and an additional 276 hotels with more than 31,300 rooms are scheduled to break ground through the course of the year. These deliveries will drag on the overall occupancy rate this year, but Houston and Dallas will be most affected as they boast two of the largest construction pipelines in the country. A dip in occupancy in 2018 will moderate ADR and RevPAR growth through the year, as both will register lower than the five-year average pace.

Investors target Lone Star State for midscale and upscale hotels. Bidding activity was strong in Texas during 2017 and the number of ho-tels changing hands increased for a second consecutive year. Interest in midscale and upscale hotel chains grew over time, accounting for 45 per-cent of all trades during the 12-month span. Approximately one-quarter of all hotels trades occurred in the Dallas/Fort Worth Metroplex, though velocity was flat, but Houston and San Antonio registered an increase in activity as investors sought hotels priced between $1 million and $10 million. Cap rates for properties in this price tranche average between 9.5 percent and 10 percent but can range 200 basis points higher or lower depending on property age, chain scale and service level. Investors will be mindful of the supply pipeline in select markets like Dallas/Fort Worth and Houston. A strong economy and business environment in the Metroplex and those helping with restoration efforts in Houston will drive demand for rooms over the year.

File Attachment: