HOUSTON, TEXAS IN FOCUS: Luigi Major, MAI Managing Director, Senior Partner. Yimei Tang Associate Intern.

Transcription

1 JULY 2014 PRICE $500 IN FOCUS: HOUSTON, TEXAS Luigi Major, MAI Managing Director, Senior Partner Yimei Tang Associate Intern HVS Houston 3000 Weslayan Street, Suite 385, Houston, Texas 77027

2 A booming economy, along with record growth in population and jobs, is bringing about the best lodging market performance in Houston s history. Can hoteliers count on this growth to last? Introduction In terms of economic thrust, the city of Houston, aka the Energy Capital of the World, has been building steam like never before. The Houston area is now home to 26 companies on the 2013 FORTUNE 500 list (second only to New York City), and the vast majority are energy conglomerates (see list below). 1 Major corporations such as Chevron, ExxonMobil, and Shell, as well as oil service companies such as Schlumberger and Fluor, also have a presence in the area in some cases, a larger presence than at their home locations. With oil prices hovering around $100 per barrel for the past twelve months, these companies have been able to continue high levels of hiring, training, and oil exploration. Oil exploration in West Texas has accelerated with the advent of new technologies and field discoveries, all of which benefit the companies based in Houston. The boom extends to the area s population growth the most recent U.S. Census estimates rank Houston as the second-fastest-growing metro area in the nation. The following article examines aspects of this growth in industry and population, and its influence on Houston s hotel industry. Key Economic Indicators Employment Houston continues to lead the nation in terms of job growth. According to the Bureau of Labor Statistics (BLS), employment in Houston grew by 63,000 new jobs in 2011 and by 94,000 in In 2013, the city added nearly 83,000 jobs, resulting in an increase in total employment of nearly 3% over the prior year. Since 2000, the city has grown at an average annual compounded rate of 2.2% (adding approximately 100,000 residents annually); these new residents primarily move to Houston to take advantage of the strong job market. 1 Energy companies headquartered in Houston include Phillips 66, ConocoPhillips, Enterprise Products Partners, Plains All American Pipeline, Halliburton, Baker Hughes, National Oilwell Varco, Apache Corporation, Anadarko Petroleum, EOG Resources, Kinder Morgan, Cameron International, KBR, CenterPoint Energy, Enbridge Energy Partners, FMC Technologies, Targa Resources, MRC Global, Calpine, and Spectra Energy. 2 Figures may vary slightly from BLS data due to estimation. IN FOCUS: HOUSTON, TEXAS PAGE 2

3 The following table illustrates historical and projected employment, population, and income data for the overall Houston market as presented by REIS. 2 Historical & Projected Employment, Households, Population, and Household Income Statistics Year Total Employment % Chg Office Employment Industrial % Chg Employment % Chg Households % Chg Population % Chg Household Avg. Income % Chg ,288, , ,516 1,724,340 4,900,920 $100, ,281,670 (0.3) % 674, % 365,439 (3.2) % 1,764, % 5,012, % 98,504 (2.1) % ,266,470 (0.7) 677, ,149 (2.5) 1,799, ,110, , ,301, , , ,832, ,199, , ,384, , , ,893, ,390, , ,487, , , ,935, ,513, , ,580, , , ,972, ,629, , ,609, , , ,019, ,778, , ,502,300 (4.1) 751,826 (3.4) 374,167 (8.7) 2,064, ,917, ,278 (9.8) ,546, , , ,104, ,027, , ,622, , , ,144, ,139, , ,738, , , ,188, ,261, , ,816, , , ,232, ,375, , Forecasts ,894, % 859, % 439, % 2,275, % 6,489, % $156, % ,992, , , ,326, ,603, , ,081, , , ,376, ,719, , ,140, , , ,422, ,832, , ,182, , ,917 (0.2) 2,466, ,943, , Average Annual Compound Change % 1.9 % 1.2 % 2.2 % 2.2 % 3.4 % (0.4) (0.2) (1.8) Forecast % 2.6 % 0.6 % 2.0 % 1.7 % 4.6 % Source: REIS Report, 1st Quarter, 2014 Houston s unemployment rate dropped to 5.1% in May of 2014, down from 6.3% in May of 2013 (and 8.6% in March of 2010 at the height of the economic recession); this continues an encouraging trend of declining unemployment that began in Even at their height, unemployment levels in Houston registered lower than national levels during and following the recent recession. The rapid recovery of the oil and gas industry, the lack of a local housing bubble (and consequent housing bust), and the strength of Houston exports to overseas markets all factor into the outperformance of Houston s economy and job market. Unemployment in Houston since 2004 Office Space Demand for office space in Houston is strong, and vacancy remains stable. Rent growth has been accelerating, while investment activity, evidenced by the recent sale of a number of high-profile assets, is robust. Houston offers approximately 170 million square feet of office space, with the majority located in the Downtown, Galleria, and Energy Corridor submarkets. The following chart illustrates office inventory in the Houston area. IN FOCUS: HOUSTON, TEXAS PAGE 3

4 Vacancy rates in the Houston area did not significantly increase during the economic recession of 2009, and since 2005, rates have fluctuated between 11% and 16%, mainly due to increases in supply. With vacancy rates decreasing and average asking lease rates improving over the last three years, new office developments have become feasible. Approximately 13 million square feet of office space is forecast to enter the market over the next three years, with six million square feet alone planned for Downtown Houston. Construction permitting in the City of Houston hit a record high in March of 2014, with the running twelve-month total topping $6.3 billion, a 21.1% increase over the same twelve-month period in Office Inventory in Houston The following graphic illustrates historical and projected office space performance for Houston. Both the amount of occupied office space and average asking lease rates reached an all-time high in Houston Office Space Demand Exceeds All Records in 2013 IN FOCUS: HOUSTON, TEXAS PAGE 4

5 Oil and Gas Demand Over 5,000 energy firms do business in Houston and the Greater Houston Partnership places energy exploration and production, oil field equipment manufacturing, and engineering at the heart of the city s economic base. The combined strength of these entities accounts for the continued growth of Houston s secondary sectors, including retail, lodging, health care, and government. Major construction operations accentuate how much is invested in Houston s energy industry. ExxonMobil will be consolidating its Houston offices, as well as other national offices, into a three-million-square-foot home campus development just south of The Woodlands in Spring, Texas, which is part of the Houston-Woodlands-Sugar Land MSA. The new campus, slated for completion in early 2015, is anticipated to house 10,000 ExxonMobil employees. Additionally, Chevron has proposed a new, 1.7-million, 50-story office tower for Downtown Houston, to be located adjacent to the company s existing twin towers. BHP Billiton, Phillips 66, Noble Energy, and Anadarko Petroleum have also recently built or are now building or planning major office facilities. Health Care Exports and Shipping Along with the mega-presence of the energy industry in Houston, heath care represents a powerful force driving the area s economy. The Texas Medical Center (TMC), the world s largest medical center, represents one of Houston s major economic drivers and core industries with an estimated regional annual economic impact of $14 billion. Founded in 1989, TMC comprises 54 institutions, employs more than 106,000, educates 49,000 life science students, and handles 7.2 million patient visits annually. TMC has continued to grow and expand over the past ten years. Between 2008 and 2012, TMC approved a $7.1-billion investment in new buildings and infrastructure, along with annual research expenditures estimated at $1 billion. TMC currently features 45.5 million gross square feet of patient care, education, and research space distributed across 280 buildings. Ultimately, TMC is projected to grow to 59 million gross square feet of medical space with additional projects planned for Houston s suburbs. Houston is the top U.S. market for exports, followed by New York City, according to the U.S. Department of Commerce s International Trade Administration. In 2012, Houston reached $110.3 billion in revenue in merchandise exports, with petroleum products, chemicals, and oil and gas extraction equipment accounting for approximately two-thirds ($73 billion) of the metropolitan area's exports. The Port of Houston is the busiest port in the U.S. in terms of foreign tonnage, second busiest in the U.S. in terms of overall tonnage, and thirteenth busiest in the world in terms of overall tonnage. According to a 2012 study by Martin Associates, ship channel-related businesses contribute 1,026,820 jobs throughout Texas (up from 785,000 jobs as cited in a 2007 study), and the shipping industry generates more than $178.5 billion in statewide economic impact. In addition, more than $4.5 billion in state and local tax revenues are generated by export activities related to the port. IN FOCUS: HOUSTON, TEXAS PAGE 5

6 Residential Market Demand Though tangentially related to lodging demand, the performance of the residential market is a key indicator of an area s economic health. Houston-area realtors sold 89,224 homes in the twelve months that ended with May of 2014, an 11% improvement over the same period in the prior year. March of 2014 marked the 34th consecutive month of year-over-year increases in home sales, and only a very tight supply of available housing ended this streak in April of The average price 00for a single-family home continues to increase, climbing to $270,000 in April of With an extremely low inventory and rising prices, home sales are anticipated to continue to decrease in the near future, or until more supply enters the market. These housing dynamics also continue to fuel the multi-family housing market, which, with an occupancy level of 90% and rising rental rates, continues to experience growth. Approximately 38,000 multi-family units are expected to enter the market in the next three years, with the majority located in prime neighborhoods of the inner city, such as Montrose, the Museum District, and Upper Kirby, as well as the growing suburbs of Katy, Tomball, and The Woodlands. Hotel Market Performance Overview of Historical Occupancy and Rate Trends After several years of fluctuation, market-wide occupancy in Houston stabilized from 2005 through 2008 on the strength of the energy industry and national economy, coupled with surges in demand following Hurricane Katrina (2005) and Hurricane Ike (2008). As with the rest of the nation, occupancy in Houston plummeted in 2009 and 2010, as lower energy prices, reduced corporate and leisure travel, and other consequences of the recession curtailed lodging demand. Increased demand from corporate-transient and convention center business helped occupancy begin a recovery in This trend continued in 2012 and 2013 when occupancy levels approached the 70% mark, a threshold not crossed in the past 20 years. After falling in 2009 and 2010, average rate in Houston improved year-overyear from 2011 through Currently, high levels of demand in Houston support a forecast of stable occupancy and accelerated rate growth as hoteliers seek to reclaim ground lost during the recent recession. Houston Achieves All-Time High in Occupancy and Average Rate in 2013 The adjacent chart illustrates historical occupancy and average rate performance for Houston hotels since In 2013, the Houston lodging market reached an all-time high in occupancy, average rates, and RevPAR, slightly exceeding levels reached prior to the recession. IN FOCUS: HOUSTON, TEXAS PAGE 6

7 Each Houston submarket exhibits its own dynamics with respect to lodging trends. For example, new construction is concentrated in Downtown Houston, where nine new hotels and seven high-rise office buildings are underway or proposed. The Galleria, a stronghold for leisure demand, is the only submarket that enjoys high occupancy levels year-round. Houston s suburban submarkets especially benefit from the presence and expansion of energy conglomerates, while hotels in the Medical Center and Galveston submarkets excel by catering to niche demand, such as medical tourism and leisure travel, respectively. Hotel Transactions Transaction activity remains strong in the Houston area, with buyers competing heavily for the limited assets for sale, and sellers seeking to monetize their investment gains. Thirty-two hotels totaling $832 million in transaction volume have sold since January of 2012, including such significant assets as the Westin Galleria & Oaks, which sold for the highest total price at $220,000,000 ($246,000 per key) and the Four Seasons Houston, which sold for $140,000,000 and commanded the highest price per key at $346,000. High investor interest continues to put downward pressure on capitalization rates, particularly in high barrier-to-entry submarkets such as Downtown and The Galleria. Conclusion The Houston hotel market has entered its fourth year of double-digit RevPAR growth, with market-wide occupancy expected to reach 70% and average rate anticipated to approach the $110 mark in The expansion of businesses, jobs, and population in Houston has brought demand for more real estate, with 13 million square feet of office space and 38,000 multi-family units expected to enter the market in the next three years. Similarly, a single-family housing shortage has led to record sales prices, despite the City issuing over 50,000 housing building permits in Houston s hotel industry benefits from all this growth, and approximately 8,000 new hotel rooms are planned throughout the city to satisfy high levels of unaccommodated demand a 10% increase in total supply over the next three years. The city underwent comparable supply growth in 2009 and 2010, and even in the aftermath of the recession, the market fully absorbed the new hotels by So long as the energy sector keeps its bearings, and all signs indicate it should, Houston s lodging market appears full of thrust, and hotel stakeholders with interests in the area should keep an ear to the ground for new opportunities. HVS July This exceeds the total number of building permits issued in the state of California in IN FOCUS: HOUSTON, TEXAS PAGE 7

8 About HVS HVS is the world s leading consulting and services organization focused on the hotel, mixed-use, shared ownership, gaming, and leisure industries. Established in 1980, the company performs 4,500+ assignments each year for hotel and real estate owners, operators, and developers worldwide. HVS principals are regarded as the leading experts in their respective regions of the globe. Through a network of more than 30 offices and 450 professionals, HVS provides an unparalleled range of complementary services for the hospitality industry. Superior Results through Unrivalled Hospitality Intelligence. Everywhere. HVS Houston works extensively on hotel appraisal and feasibility assignments throughout South Texas and the Gulf Coast region. Our hotel experts offer advisory and appraisal services for all branded and independent limited-, select-, and full-service hotels and resorts. We invest in our associates' continual training and education, benefiting you with a consulting and valuation team keenly abreast of the latest market conditions and trends. About the Authors Luigi Major, MAI is the Managing Director and a Senior Partner of the HVS Houston office. Luigi earned his bachelor's degree from the University of Houston's Conrad N. Hilton College of Hotel and Restaurant Management. Luigi travels and works extensively in the U.S. and Latin America. Please contact Luigi at (214) or lmajor@hvs.com. Yimei Tang holds a Bachelor of Science degree in Accounting from the University of Jinan in Guangzhou, China. In addition, Yimei is currently working on a Bachelor of Science degree in Hotel and Restaurant Management from the Conrad N. Hilton College at the University of Houston. During her internship with HVS, Yimei collaborated on hotel valuations, feasibility and market studies, supply and demand analyses, and forecast of income and expenses. HVS Houston 3000 Weslayan Street, Suite 385, Houston, Texas 77027