The Texas Hotel Market: Stabilization on the Horizon

By: Rod Clough, Gretchen Hazel, & Amanda Repert

It is no surprise that Texas hotel markets experienced substantial decline in 2001.  Well before the horrific events of September 11, local hotel markets tied closely to demand generated from the technology and telecommunications upswing - such as north Dallas and Austin - had seen negative turns early in the year.  Most other sectors important to the hotel industry soon followed suit and weakened, some more than others, and the slowdowns in the Texas lodging industry became more widespread.  But indications now point to a bottom for those markets hardest hit.  Although some weakening may persist during the first quarter of 2002, a stabilization period is expected to follow, leaving the market positioned for better times in 2003.  The following discussion outlines the major market influences that should lead to this anticipated stabilization.

There will be only a handful of new hotel openings in Texas’ major markets in 2002.  A year of recovery should be helped by low supply growth statewide, as banks have virtually cut-off all financing for new hotel construction.  Lenders will be open to lending on new hotel construction only after the market recovery is well underway.  This hesitant position has been reinforced by the recent bankruptcy of the Westin Beechwood Resort.  However, we note that although a poorly timed October 2 opening date and the state of the economy in the fall did not help matters for the resort, many other challenges plaguing this particular hotel contributed to its current situation.  Of these, the most critical isssue remains its location in a largely undeveloped area on the northern edge of Fort Worth.  Except for the nearby Texas Motor Speedway, the hotel’s Beechwood location currently includes no significant demand generators.  This is a dramatic contrast to the D/FW resort competitors, such as the Four Seasons Las Colinas and Westin Stonebriar, which are surrounded by major corporate headquarters and office complexes.  Beechwood’s available sites were expected to be replete with office buildings upon the hotel’s opening; however, this construction never materialized and the hotel remains the lone improvement in the park.

Hesitation in the market was also fueled by the closure of the Felcor Lodging Trust-owned Sheraton Park Central in north Dallas.  This sub-market, which features three other full-service hotels in addition to the Sheraton (all four are owned by Felcor) and numerous limited-service hotels, was especially hard hit in 2001, as a result of its primary reliance on the adjacent Texas Instruments headquarters operation.  Park Central, which is at the crossroads of Interstates 635 and 75, also experienced a significant impact to its accessibility starting mid-2001, as a major highway construction project began to completely replace and enhance the interchange.  Construction on this intersection, which will ultimately be a five level interchange with a full network of access roads, is said to be the largest interchange project ever undertaken in the State of Texas and is scheduled for completion by the end of 2006. 

Despite the noted factors that directly influenced the poor performance of these specific hotels, these high profile events have tainted the perception of the lodging market throughout the region.  As a result of this perception, combined with the soft market conditions, the lending climate is expected to remain constricted for new construction in Texas’ major markets over the foreseeable future.  The resultant slow down in additions to supply should help halt the downward spiral that many markets have experienced over the past couple of years.

Only a few projects well underway prior to the fall of 2001 will open in 2002, such as the 227-unit Radisson Carlson Park in the southwestern San Antonio area.  The hotel, set to open in February, will be a component of the Carlson Lifestyle Living concept, a destination golf and spa resort community.  In addition to new convention headquarters hotels on tap in Fort Worth, Austin, Houston, and San Antonio, the proposed Marriott Resort at Horseshoe Bay and Gaylord’s Opryland Texas are two major projects scheduled to open in 2003 and 2004, respectively.  Several additional golf and spa resorts remain in the early stages of development throughout the perimeter Austin area, but actual openings are unlikely over the next 24 months, which should contribute to the hotel industry’s stabilization through early 2003.

After years of expansion and renovation, the state’s major convention centers will be ready for action late in the year. In the midst of a weak year for business and leisure travel, the state also experienced a slow convention year in 2001, as many convention centers across the state were under expansion and renovation.  Fort Worth’s new convention wing began to take shape over the summer, while the larger Dallas center across town was the site of an expansion that will make the main hall one of the largest in the country.  Similarly, the city of Austin is in the process of doubling the size of its center.  All of these projects are scheduled for completion later this year; however, given convention booking cycles and the lead time required for bookings, the benefit from these centers will not be substantial until 2003 and 2004.  And although new headquarters hotels are in the works in both Austin and Fort Worth, openings are not expected before early 2004 and 2005, respectively.  This will allow those area hotels to benefit from their newly expanded centers in the near term without any new major competition, but may the lack of a designated headquarters hotel may impair the marketability of the centers.   The $110 million renovation of Houston’s George R. Brown Convention Center is scheduled for completion in late 2003; this project will expand the facility from ±531,000 square feet of net rentable space to ±1,130,147 square feet.  The adjacent 1,200-room Hilton Americas Hotel is now under construction and is also slated for completion by the end of 2003.  Houston’s Reliant Center, formerly the Astrodomain Complex, is also under expansion with a completion date set for August 2002.  The stadium will be the home for the city’s expansion NFL team and Super Bowl XXXVIII in January 2004. San Antonio unveiled its expanded center mid-2001, and will gearing up for its first full year of activity.  The new center’s 440,000 square feet of contiguous space is highly popular on the national convention scene. Developers of the center’s new 1,200-room Sheraton headquarters hotel hope to complete financing for the project early in 2002.

The energy sector remains a prominent industry in the state, and most major players are poised for a better 2002.  An oversupply of oil, a fall in gas prices, and an overall drop in energy demand caused some contraction in this sector during 2001, which was highlighted by Enron’s highly publicized collapse.  With the economic recovery on the horizon, this should lead to higher demand for this sector and with an expected turn in fuel prices, this sector should see stabilization in 2002.  Stocks are already turning, with ExxonMobil Corporation showing almost no change in stock price for the 4th quarter, which compares favorably to the year’s loss of almost 10%.  According to reported sources, the energy sector “has managed its exposure to Enron’s bankruptcy reasonably well.”  Companies such as Dynegy, Calpine Corporation, El Paso Corporation, and Williams and Mirant Corporation have released comprehensive plans to improve the strength of their financials by executing asset sale and equity offerings.  According to S&P, many of the companies have sustained favorable credit ratings.  Enron’s departure from the European energy trading markets has left behind approximately 20% of Europe’s $150 billion energy trading market.  In the future, opportunity exists for a few American companies vying to capture this market, which are expected to outride the European utilities. The three companies include Houston-based Dynegy, Dallas-based TXU, and Ohio-based American Electric Power. 

Technology shows some signs of strength and remains a very important contributor to the Texas economy.  In Austin, technology demand remains an important, albeit less noticeable source of demand for area hotels.  Austin is widely considered the high-tech hub of the south-central region, although corporate downsizing and restructuring has equated to thousands of lost jobs in the city in 2001.  However, companies such as Motorola, Dell, IBM, Applied Materials, and Advanced Micro Devices (AMD) are just a handful of technology companies that are expected to announce local expansions in 2002 after experiencing contraction in 2001.  There are several, planned commercial expansion projects happening throughout Austin, the most notable of which are occurring in the downtown business district.  Two high-tech companies, whose fate will be decided in the coming year, are included in this development list:  Computer Sciences Corporation (CSC) and Intel.  CSC is in the process of completing a 600,000-square-foot downtown campus; however, due to the high-tech pit-falls of 2001, CSC will reportedly occupy only 250,000 square feet of the project while the remainder of the space will be sub-leased.  Intel made plans to develop a 500,000-square-foot building in downtown Austin in 2000; however, construction was ceased on the site in early 2001 after high-tech indicators pointed south; a decision on the status and future of the development is expected to come in March 2002.  Many Austin area sub-markets and product segments have experienced significant over-supply…thus, any increase in demand associated with high-tech corporate expansions in 2002 is expected to be somewhat diluted until supply stabilizes sometime in 2003.  Of high-tech companies that call the Austin area home, Dell Computer Corporation remains one of the strongest, if not the strongest, economic drivers.  ABC News had this to say about Dell in a December 28, 2001 article entitled The Good, the Bad, and the Bankrupt: The Business World in 2001: “Quick, name the one personal computer maker turning profits during the PC slump. It's Dell, whose vaunted production-on-demand system is made to order for tough times.”  Thus, while the prognosis for growth is both slower and less dramatic than a year ago, demand from this sector can be expected to increase over the coming year.

Hospital expansions throughout the state should provide growing hotel demand from the important healthcare sector. Houston’s internationally known Texas Medical Center, which is the largest in the world, is expected to continue to be a stable and growing sector in the city’s local economy.  Historically, this sector has served nearly five million patients annually, with a total economic impact of approximately $10 billion for Houston.  Several renovation and expansion projects were announced in 2001 for the Texas Medical Center area.  These include the George & Cynthia Mitchell Basic Sciences Research Building, which will house a new $174-million, 505,000-square-foot biomedical research facility; the new M.D. Anderson Basic Science Research Building will be a 505,000-square-foot facility that will be connected to the existing M.D. Anderson complex; the M.D. Anderson Proton Therapy Center will be a $100-million, 78,000-square-foot high-tech cancer treatment facility; and the University of Texas School of Nursing will construct a $60-million, eight-story, 195,000-square-foot facility.  An additional long-term project is also planned for the area.  The Southeast Texas Bio Technology Park will take two decades to complete and cost an estimated $633 million to develop.  The park will be located on 64 acres, create an estimated 23,000 jobs, and include 15 research buildings totaling two million square feet.  The developers of the project include Texas Medical Center, NASA, local universities, and the local government.  Upon completion, Houston will be enabled to translate life-science research into commercial pharmaceuticals and medical products.

News on the Texas hotel frontier is promising for 2002.  Few hotel openings are on tap over the next 12 months.  Convention centers are debuting newly renovated and expanded facilities statewide this year and won’t be met with major hotel openings through late 2003.  With the Enron collapse behind us and brighter economic times ahead, sectors important to the hotel business traveler, such as the energy, telecommunications, and technology sectors are showing the early signs of stabilization.  Finally, expansions underway in the healthcare industry should bode well for hospital area hotels.  HVS will be watching this year to see to when the harder hit technology and telecommunications sectors begin to show greater promise, and how effective the cities’ are at selling their newly renovated and expanded convention centers.

Rod Clough
Gretchen Hazel
Amanda Repert
2229 Broadway
Boulder, CO 80302
303-443-3933
303-443-4186 FAX

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