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Energy, economy drive demand at Houston hotels
May 15 2013

Houston’s expanding energy sector and booming job market is piquing hoteliers’ interests.

Highlights
  • Houston occupancy is up 6% to 70.4%, ADR increased 6.2% to $100.63 and RevPAR is up 12.6% to $70.88 year to date through March, according to STR.
  • Sales of offices in Houston rose 32% to $3.89 billion in 2012, the highest in five years.
  • The proposed expansion of the Panama Canal could drive demand.
 
The 378-room Omni Houston Hotel-Galleria has become a popular wedding destination ever since Omni's Owner TRT Holdings, spent $30 million to add a ballroom at the hotel.

HOUSTON—With its fast-expanding energy hub and already booming oil market, Houston is on the radar of hotel owners and investors.

The fourth largest city in the U.S. also has one of the strongest job growth markets in the nation, said Patrick Campbell, principal at real estate investment firm Wheelock Street Capital, which is one reason his company finds the hotel market attractive.

“We developed a thesis in 2011 that Houston was a very strong market,” he said. “It has some seasonality and supply issues, but there are great fundamentals.”

Campbell said the a combination of Houston’s economy, healthy revenue-per-available-room forecasts and oil industry demand played a role in the last year’s acquisitions of the 297-room Hilton Houston Westchase  and the 380-room DoubleTree Suites by Hilton Hotel located in Houston within the Galleria submarket.

“We’ve seen an uptick in demand at the Hilton, which has a fair amount of meeting space,” Campbell said.

During the first quarter of 2013, cccupancy in Houston was up 6% to 70.4%, average daily rate increased 6.2% to $100.63 and RevPAR grew 12.6% to $70.88, according to STR, parent company of HotelNewsNow.com.

Because submarkets such as Galleria and Westchase have a lot of corporations, “there is lots of hiring and training, all of which benefits the hotels,” said Luigi Major, managing director at HVS’ Houston office.

According to New York-based research firm Real Capital, sales of offices in Houston rose 32% to $3.9 billion in 2012, the highest in five years. Campbell said he expects the increase of office space, specifically in the Galleria market, to help drive demand at his properties.

The medical industry is important to Houston, Major said, adding that the Texas Medical Center, the largest medical center in the world, drives demand in the Greater Houston area.

Bob Cowan, GM at the Omni Houston Hotel-Galleria said he has also seen considerable growth in the health-care sector as evidenced by demand at his property. Still, it’s weekend wedding business that is driving the demand at his property.

The Omni Houston Hotel-Galleria is located in an urban setting and caters to corporate, social and association demand. Cowan said the Omni is an “oasis in a sea of concrete” and has become a popular wedding destination ever since Omni’s Owner TRT Holdings spent $30 million to add a ballroom at the hotel.

“(Weddings) really have helped our overall weekend market,” Cowan said, adding that nearly every weekend is sold out, which is unusual for a hotel in an urban setting.

Supply growth
With the exception of 2010 and 2009, Houston saw a 6% increase in supply each year since the last downturn, according to HVS’ Major.

“After that big increase in 2010, we’ve been seeing a 1% increase in the years that follow,” he said. “As Houston continues to get stronger, it will justify supply in 2015 and 2016.”

According to STR’s April pipeline numbers, there are 7,255 rooms under construction, which includes final planning and planning stages. Of those 7,255 rooms, 856 are under construction.

The 1,000-room Marriott Marquis, developed by Rida Development Corporation, will be a convention center hotel, and is scheduled to break ground next year, Major said.

The convention center has been an important demand driver for the downtown Houston market, Major said, adding that generally some citywide conventions will overflow to other submarkets.

“(The convention center) has been doing well as in steady, however, the expectation is that when the 1,000-room hotel is added it will compete (with top convention markets),” he added.

Major said he expects the supply trend to continue into the near future because there hasn’t been any “drastic changes in the way that financing has been going.”

Since financing is making a slow return, some companies such as Wheelock Street Capital and RLJ Lodging Trust are going the acquisition route in the market.

On 19 March, RLJ acquired the historic Humble Oil Building complex in downtown Houston for a purchase price of $79.5 million. The complex consists of an 82-unit apartment tower that will be converted to a 166-room SpringHill Suites and two existing hotels, the existing 191-room Courtyard by Marriott Houston Downtown Convention Center and the 171-room Residence Inn by Marriott Houston Downtown/Convention Center.

Betting on Houston’s energy sector
Houston’s energy corridor, which already houses big players such as BP America, Citgo Petroleum Corporation, Shell Oil Company and ExxonMobil Chemical, is expecting a handful of additional companies to join the hub.

Royal Dutch Shell plc, Europe’s biggest oil company, is adding two buildings to its Energy Corridor campus, and Melbourne-based BHP Billiton, the world’s largest mining company, has plans for a 30-story Galleria tower, according to a Bloomberg.com article.

“Houston is a city that’s dependent on the energy and oil sector,” Major said. “With that demand increasing, those companies in Houston are benefitting.”

Cowan said energy is a big part of the Omni’s business and that he doesn’t see it going away any time soon.

“I think Houston will continue to be successful because energy is here for the long term, whether it be oil, gas, wind or other greener forms of energy,” he said.

Panama Canal expansion
Another potential demand driver for the Houston market is the proposed widening of the Panama Canal, which will double the capacity of the Panama Canal by 2015, according to the Panama Canal Authority, which proposed the project in 2006.

The Houston ship channel is centrally located to receive goods from Asia and is currently the biggest metropolitan area located near Panama, HVS’ Major said.

“The port has always been a demand driver for Houston,” he said. “There are lots of oil refineries that then need to take that final product elsewhere.”

“We think that there are long-term benefits from the widening of the Panama Canal,” Wheelock’s Campbell said. "It will allow ships of up to three times (the current capacity)."

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