Leisure Travel Is Helping Houston Hotels, But Full Recovery Is Years Away
Without conferences, live events or typical business travel, Houston's hotel owners and operators have been forced to navigate a severe disruption to both occupancy levels and revenue.
As lockdowns across Texas and neighboring states have begun to ease, leisure travelers are beginning to return to the city, providing much-needed improvement on weekends. But there is a long road to recovery — it may be 2024 before Houston hotels return to 2019 levels.
Alison Hoyt, a senior director of consulting and analytics at STR, told Bisnow that hotel performance in Houston began to decline in the second half of March and hit bottom in April, when average occupancy was 24.8%.
Occupancy and revenue have improved each month since then, but the pace of that improvement began to slow after Labor Day on Sept. 7, which usually signals the beginning of the off-peak fall travel season. Houston’s hotel occupancy rate in September averaged 46.9%, compared with 61.1% during the same month in 2019, according to STR data.
Full-service hotels, which make more than 5% of their revenue from food and beverage, generally need to be at 50% occupancy to generate a positive gross operating profit, Hoyt said. For limited-service hotels, that percentage is a little lower, at about 40%.
The hotel industry also measures performance by calculating revenue per available room. In Houston that figure averaged $36.20 in September, down 41.5% from a year ago, STR data showed.
One small bright spot for the travel industry has been rising demand for leisure travel on weekends, which began to materialize during the summer months and has persisted into the fall.
Across the U.S., occupancy during the weekend of Oct. 9-10 reached 62.3%. Only the Labor Day weekend scored higher, at 63.3%. STR’s data measures weekend activity as Fridays and Saturdays. In Houston, occupancy rose to 67.5% on Oct. 10, and revenue per available room rose to $44.41.
Tom Segesta, the general manager at the Four Seasons hotel in Downtown Houston, told Bisnow the hotel is hosting mostly leisure travelers right now, and primarily on weekends. Milestone events like weddings or anniversaries are also contributing to bookings.
“There's a number of families that want to still celebrate those milestones, and do it in a manner that’s safe and comfortable,” Segesta said.
Submarkets are performing differently across Houston, with suburban hotels generally seeing better occupancy than Downtown Houston and Galleria assets, according to Moody National Cos. Chairman and CEO Brett Moody. That largely has to do with how much of the typical customer base is made up of corporate travelers.
Moody National has three hotels in Houston, and Moody said its two extended-stay products, located in the Texas Medical Center and The Woodlands, are performing noticeably better than the Hampton Inn location in the Energy Corridor. The extended-stay hotels have their own kitchens, and the average stay is usually between three and five days, Moody said.
“Our extended-stay product in the Medical Center is faring very well, and [is] somewhat comparable to last year,” he said.
At the end of July, Central Houston President Bob Eury told Bisnow that Downtown Houston has been particularly affected by the coronavirus pandemic, as much of its bustle typically stems from workers and business travelers, conventions at the George R. Brown Convention Center and other sporting and entertainment events.
Like Eury, Segesta said businesses in Houston’s downtown area are likely facing a slower recovery than other parts of the city. Without the usual stream of business travelers between Monday and Thursday, weekends are where hotels are getting their numbers back up.
“We are recovering, and we are slowly gaining occupancy ... [the] leisure front is really where most of the business is coming from nowadays,” Segesta said.
With typical conference-driven group demand for travel in Houston still much lower than usual, hotels are facing a quiet remainder of 2020.
“We're preparing for a slower fall season, especially with rising cases across much of the U.S.,” Hoyt said.
Average room rates in Houston were about 19% lower than usual in September. Though part of that may be attributed to reduced demand, hotel operators are also offering discounts to persuade more travelers to stay.
In June, Houston First Corp. launched its Do Something New, #Explore HOU staycation campaign, targeting Houston residents. The organization worked with more than 40 hotels on vacation packages that offered anything from private yoga and in-suite spa services to private helicopter tours.
Houston First told Bisnow the staycation campaign through Labor Day booked an estimated 91,785 nights in Houston, which generated over $9.7M in hotel revenue for the market, and created over $20M in economic impact. Since Labor Day, that campaign has led to another 27,000 room nights and $2.9M in hotel revenue, adding another $6M in economic impact to the market.
“Without meaningful group business and without corporate demand, there's just a change in the type of traveler who's staying at hotels. So hotels are having to be a little bit creative in what channels they're using and what travelers they're reaching,” Hoyt said.
“When they might have had a large convention filling a hotel at a set rate, that's now all individual, maybe one- or two-night travelers. So it's really a change in composition of the types of travelers.”
Segesta said the Four Seasons hotel participated in the staycation campaign and found that the majority of travelers who took advantage of that campaign were not actually Houston residents. Instead, most of them were from other parts of Texas or Louisiana, within reasonable driving distance.
Moody’s hotels in the Texas Medical Center and The Woodlands participated in the campaign, and he said other assets around the country have also benefited from travelers in driving distance.
“That's been one of the saving graces, if you will ... the drive traveler,” Moody said.
Despite the uptick in travel, it will be a long time before Houston hotels are back to normal. The financial pressure on Houston’s hotel sector is affecting the ability of owners to meet their debt demands. About $720M in CMBS hotel loans are delinquent in Houston, equating to a delinquency rate of 72% across the metropolitan statistical area — a higher percentage than any other major MSA in the country, according to Trepp.
Despite that figure, there have not been permanent closures of hotels in the Houston market to date. As of Oct. 20, 1,394 rooms in Houston are temporarily closed across six properties, while 8,297 rooms have reopened across 35 properties since the beginning of the pandemic, an STR analysis found.
At the height of shutdowns and restricted travel in April, around 6,000 rooms were closed across the Houston market, Hoyt said. But as of September, the number of available hotel rooms in the Houston market equaled 94,457 — barely below the pre-pandemic February number of 94,612.
“The supply number is, for the most part, back to pre-pandemic levels as most hotels have either reopened or any permanent closures [are] being replaced with the new openings,” Hoyt said.
Moody said the elevated rate of CMBS hotel loan delinquencies in Houston is a reflection of an oversupplied market, as well as the turbulence in crude oil prices this year, which has hurt Houston’s energy sector. The pandemic restricted both leisure and business travel, and it has only added to the distress.
“You've got all three of those lining up against the Houston market. And that would be the reason for your higher delinquency on your CMBS in the Houston market than most others,” Moody said.
STR’s forecast indicates revenue per available room across the U.S. will decline by an average of 52.3% for 2020. The firm expects that figure to increase by 37.9% in 2021, but the improvement is still based on a much lower-than-usual starting point. Hoyt said it could take another three years for revenue to return to normal.
“It really won't be until probably 2024 as our forecast stands right now, until we're back to 2019 performance levels,” Hoyt said. “I think most urban markets could follow the multiyear recovery that we're seeing at the total U.S. level.”
That forecast is in line with expectations voiced within the airport concessionaire industry, which is also highly reliant on business and leisure travelers. In a revised outlook published in August, S&P Global said it expects U.S. air passenger volumes to return to 2019 levels by 2024.
Segesta said members of the hotel industry all see the same data, and that he is inclined to agree with the timelines that point to a three- to four-year recovery.
“If it's faster, [it's] good for all of us, and good for the people. But obviously, the pandemic has slowed many businesses down. And any time that happens, it just takes a while to return to normal ... just like any recession that has taken place over the last 50 years,” Segesta said.
Moody said he had no reason to disagree with the 2024 recovery forecast, but noted that the hotel sector will need to eventually figure out whether business travel will ever actually return to full 2019 volumes, given the rapid rise and acceptance of virtual meeting tools.
“I think that the return to normal by 2024 is absent of answering the question, How many types of transactions will find themselves taking place over Zoom, as opposed to face to face? And I don't think they've factored that in,” Moody said.