Hotel Market Patchy Across the Texas Triangle

School’s out, and flights are booked. The summer travel season is underway.

As visitors to Texas’ biggest cities check in to their hotels, they will be participating in a lodging sector still operating below pre-pandemic occupancy and revenue levels in many submarkets. At the same time, investors are pouring into the scene, developing thousands of new rooms.

With hundreds of miles and vastly different tourism scenes between them, each metro in the Texas Triangle has a different outlook. Take a trip across the markets:

Houston

With low occupancy rates, high delinquency, and a decrease in cash flow, Houston was ranked the nation’s worst hotel market in a March report by Trepp. Almost 70 percent of Houston’s lodging properties have a debt service coverage ratio of less than 1x, putting them at risk of defaulting. A hurting hotel market ushered in the new year with the Marriott Galleria resolving for a loss on a $29 million loan back in January. The Crowne Plaza Houston Galleria sold at auction and resolved for a loss on a $28 million loan, the largest commercial mortgage-backed securities loan to resolve for a loss in March.

Houston’s rolling hotel deliveries could be to blame for the distress, data from CBRE Hotels Research shows. The Bayou City has seen a 1.5 percent increase in supply since 2020, it’s expected to grow by another percentage point in 2024. Meanwhile, demand remains droopy. The city’s occupancy rate is among the lowest in the country with a weighted average of 53 percent over a 12-month period, Trepp reported.

CBRE forecasts a 62 percent occupancy rate in 2023, but only time will tell. As of March, Houston had more than $1 billion in total hospitality loans and a delinquency rate of 43 percent. The city has a long way to go before it’s as stable as its Texas counterparts.

Dallas-Fort Worth

Hotel construction in the Dallas-Fort Worth area is having a record season, with more than 251 projects underway, the Dallas Morning News reported. North Texas continues to build more hotels than anywhere in the country with more than 30,000 guest rooms in the pipeline to begin 2023, according to data from Lodging Econometrics. For context, Atlanta is a far second place with 18,000 rooms set to be delivered this year.

Notable developments include the JW Marriot Hotel on Ross Avenue, the $750 million Four Seasons in Turtle Creek and the recently opened $520 million dollar Omni resort at PGA Frisco.

Like most of the country, DFW hotels took a hard hit during COVID but have completely bounced back and then some, CBRE Group vice president Kevin Donahue said.

“The fundamentals of the hotel industry remain strong and the DFW hotel market continues to improve coming out of the pandemic declines,” Donahue told the outlet. “Certain submarkets have recovered quicker than others, but many of the DFW submarkets are outperforming pre-pandemic figures.”

Don’t expect this record development pace to continue throughout the year. Construction costs are up 40 percent, and any projects that are not already financed are unlikely to move forward this year, Texas hotel investment consultant John Keeling told the outlet.

“Any hotels under development in DFW likely were financed in the third quarter of last year or earlier,” Keeling said. “I expect there will be fewer viable hotel developments in the near term and likely a delay of a year or so for the ones that make sense.”

Austin

Between South by Southwest, the Formula 1 Grand Prix and seemingly every bachelorette party in the country, there’s no shortage of visitors in Austin. But occupancy rates remain well below pre-pandemic levels, and economic worries are only making the situation worse, according to a recent report from Marcus & Millichap. Last year, the city’s hotel occupancy rate failed to break 70 percent, and only around six in every ten rooms will be filled by the end of 2023, the commercial brokerage projects.

At the same time, Austin recorded the second-largest hospitality “supply change” of any major metro between 2019 and 2023. Some 2,800 rooms were under construction at the start of 2023, and the report estimates a 5 percent jump in supply by year’s end. While that is lower than Austin’s recent standards, it nonetheless represents the third-largest jump among major American cities.

In part due to that supply increase, occupancy rates are projected to fall to 62 percent, nearly 10 percent below 2019 levels. As a result, the report’s authors expect revenue per available room to decline nearly 11 percent to $102. The average daily rate is also expected to dip to $164.

Though the breakneck pace of Austin’s hospitality growth has slowed, there is less fear of refinancing difficulties for hotel owners with debt coming due. “It may not be as attractive as they hoped. But I’m not seeing a situation where you’re going to see distress,” said Allan Miller, an agent in Marcus and Millichap’s hospitality group.

San Antonio

The Alamo City’s hotel occupancy rate reached a 17-year high of 68 percent last year, the highest among major Texan markets, according to a report from Marcus & Millichap. While the city has seen sustained demand, new supply has only moderately grown — fewer than 600 new rooms were in the pipeline at the start of this year, and just one 200-plus key project.

The city’s growing demand, coupled with steady supply, has led to a surge in revenue per available room, which is expected to reach $89 in 2023. The average daily rate has also increased slightly, on par with pre-pandemic growth rates.

“Of all the hotel markets in Texas, San Antonio has been the most steady,” Miller said.