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Houston Needs This One Fundamental To Rise To Spark More Luxury Hotels

Houston Hotel

Houston hotels struggle to maintain an average daily rate that is comparable to other major metros.

If it doesn't improve, luxury and full-service hotels will be slow to come to market or will have to be included in a mixed-use environment to make the numbers work.

“You really need those higher ADRs to justify new construction and upper-tier hotels,” TRC Capital Partners Principal of Investments Kellie Jenks said. 

American Liberty Hospitality CEO Nick Massad, TRC Capital Partners Principal of Investments Kellie Jenks, CBRE Hotels Advisory Capital Markets South Central Region Practice Leader Jeff Binford, New Horizons Hospitality President Aly Valiani and Rida Development Corp. Chief Operating Officer Luke Charlton speak on a Bisnow panel in Houston, November 2018.

Luxury Promotes More Luxury

Houston is the largest city without a Ritz-Carlton. The company and many other luxury brands have toured several sites on different occasions, American Liberty Hospitality CEO Nick Massad said, but none have bitten because of the city's inability to capture the rates that can support it. 

Jenks, whose company built the InterContinental Houston Medical Center Hotel near the Texas Medical Center, told the crowd at Bisnow’s Houston 2019 Forecast this week that she can count on one hand, maybe two, the number of hotels that consistently bring in an ADR between $250 and $275. 

Rates must be much higher to snag a high-end hotel. The Mandarin Hotel considered a site downtown but needed rates about $550 per key, and Ritz-Carlton needs a similar range, Massad said. His company operates four hotels Downtown: Embassy Suites Houston Downtown, The Sam Houston Hotel – Curio Collection by Hilton, Hampton Inn Houston Downtown and Homewood Suites Houston Downtown.   

This is not only an issue for developers and owners but for lenders. There aren't that many financial players willing to loan funds for a luxury hotel, and that list shrinks when you get to Houston because the rates generally don’t support the cost, Rida Development Corp. Chief Operating Officer Luke Charlton said. 

The minimum cost for a high-end hotel runs between $3M and $5M, and rates beyond the mid-$200s are necessary to make it viable to secure financing, he said.

The industry is watching The Post Oak Hotel, by Houston Rockets owner and billionaire Tilman Fertitta, to see if the city has the bandwidth to support higher rates. 

"All eyes are on the Post Oak," Jenks said. "Every developer in town is looking to see where the ADR goes on that and how it performs." 

As Houston delivers more new hotels, the existing properties can bring their rates underneath the leaders, Massad said. Therefore, Houston needs more hotels on the higher end of the scale.

“[Fertitta] is breaking that glass ceiling,” he said. “That property will help set a new ceiling for rates in the city.”

Exterior shot of The Post Oak Hotel in Houston

Layering In Luxury In Mixed-Use Projects 

To bring in a high-end brand and to make the figures pencil out, the next wave of mixed-use development may include a luxury hotel component, Jenks said.

In the Houston market, that solution presents another problem: What will the second use be?

The most traditional complement to a luxury hotel is condos, but Houstonians have not historically been interested in the property type, she said. Apartments, while a treasured asset in Houston, don't always provide the best tenant mix when matched with a luxury hotel brand.

The InterContinental Hotel Medical Center Hotel is trying its hand by partnering with a luxury apartment community, Latitude Medical Center, Jenks said.

The accommodations appeal to Texas Medical Center patients and among the traditional amenities offers an in-house surgeon suite to allow doctors to meet with patients remotely.

As everyone knows, the office market has struggled since the 2014 oil bust and is only in the beginning stages of recovery. 

DPR Construction Project Executive Greg Trujillo, Associated Builders and Contractors of Greater Houston Vice President Jennifer Woodruff, NewQuest Properties Executive Vice President Chris Dray, CDC Houston Executive Vice President Warren Wilson and New Hope Housing President and CEO Joy Horak-Brown

CDC Houston Executive Vice President Warren Wilson said top-tier employers want an environment that includes hospitality, retail and residential.  

Houston CityPlace Marriott at Springwoods, a full-service hotel in the village opened in October to cater to that corporate need. The key was the timing, Wilson said.

"In 2017 and '18, we had to line up the various pieces of mixed-use and cause them to all come forward at the same time, which was a significant challenge," he said.    

High-end hotels in Houston may require a developer layering in the luxury within an existing building or utilizing city incentives to keep the cost down, Massad said.

Another option is to find ways to get more people through the door. 

Marriott Marquis Houston, a 1,000-room convention center hotel in downtown, has a 50/50 split between rooms and food and beverage offerings, Charlton said. 

The hotel is home to the rooftop Texas-shaped lazy river that is open to the public. The hotel is a popular place for a weekend staycation, and guests capture Instragrammable moments that they share with their family and friends that increases the social media attention on the hotel, he said.

The Post Oak Hotel, which opened in March, also offers an array of on-site amenities such as a spa, four full-service restaurants and bars and a two-story Rolls-Royce showroom.

Other luxury options like fine dining restaurants and Bentley and Bugatti car dealerships are also located on the hotel grounds. But as a whole, Houston hotel developers haven't determined the best amenities to bring in the crowds.

"Houston hasn't figured out the gimmick," he said. "We haven't figured it out on the same scale as the Dallas and Denver of the world."