Supply Boom Weighs on Occupancy in Dallas; Smaller Metros Attract Buyers
Occupancy declines in major Texas markets amid growing hotel supply and readjustments from the hurricane. Hurricane Harvey lifted occupancy considerably in 2018. The rate will fall slightly this year as room nights adjusted closer to level recorded before the storm. Houston, which had the greatest impact from the hurricane, will likely face a second year of declining occupancy growth as it readjusts from the more than 400-basis-point lift driven by Harvey. The drop in the rate will also push down on the average daily rate and RevPAR in the metro this year. Outside of Houston, hotel construction is ramping up in Dallas, which already has one of the largest construction pipelines in the United States. The increased supply will weigh on the metro’s occupancy this year, though steady demand will keep the rate above the statewide average. Overall, improvements in many of the state’s smaller markets will negate a large decline in overall occupancy this year.
Bidding heats up in smaller markets; Dallas/Fort Worth attracts out-of-state attention. Transaction velocity slowed notably last year as many investors reevaluated their strategies after the impact of Hurricane Harvey. This year, buyer demand will likely pick up in many of the state’s smaller markets where first-year returns up to 200 basis points higher than within Dallas and Houston can
be found. These areas include El Paso, San Antonio and Lubbock, where buyers are primarily targeting limited and select service ho-tels comprising 150 rooms or less. While sales are increasing in these smaller metros, nearly a third of hotel transactions will continue to take place in the Dallas/Fort Worth market. In addition to local investors, many out-of-state buyers, particularly from New York and Georgia, are targeting area properties. Hotels in the market change hands with first-year returns in the 10 percent band on average.
