Let’s Get Real About Hotel Real Estate in Texas
By Steve Van, president & CEO, Prism Hotels & Resorts
While 2020 was a trying year for companies in every industry, the hospitality sector has been really taking it on the chin.
Restaurateurs and airline executives might disagree, but hoteliers have arguably had it worse than any other industry. The financial impact on the hotel business from COVID-19 is 10 times worse than the hit from the late 2000s recession — and that’s a very big deal.
With the rate of business travel falling off a cliff and leisure travel down more than ever around the world, 2020 was a year that many hospitality executives would like to forget. But that doesn’t mean the sky is falling — or that brighter times aren’t in store. But what do those timelines look like? How should hotel professionals be managing the current crisis, and what are the real estate implications for investors?
Let’s take a clear-eyed look at the good, the bad and the ugly and try and answer those questions by examining key trends and thinking about what’s likely to come next for hotel developers, operators and investors.
One important caveat to the story of catastrophic hotel business drop-offs is that the situation in markets like Dallas and Austin is not nearly as dire as in other parts of the country.
Texas is one of a handful of Southern states where the combination of warm weather, low taxes, affordable housing and an increasingly talented and educated workforce is attracting high-profile companies.
Hewlett Packard Enterprise recently moved its headquarters to Houston, and companies like Tesla and SpaceX are considering moves out of California as well. This is important because hotel performance tends to track pretty closely with GDP growth, and there’s reason to believe that the coming recovery in Texas will be a lot faster and more robust than in other parts of the country.
Vaccine rollouts and COVID-19 case numbers now steadily starting to move in the right direction have made the end of the pandemic feel like a real possibility. The big variable, of course, is the timeline. When and how quickly the pandemic will retreat —and subsequently, how quickly the economy and the industry will recover — remain unknown.
For now, the situation might best be described by that famous opening line in the classic A Tale of Two Cities: “It was the best of times, it was the worst of times.” Given the fact that every hotel property in the country has lost a substantial amount of value in the last year, it’s not exactly controversial to say that this isn’t a good time to own a hotel. For investors, it’s the exact opposite: there are real opportunities out there, for those with the resources and strategic savvy to capitalize on them (more on that later).
Any Portfolio in a Storm
At Prism Hotels & Resorts, we don’t pretend to have any specific stock market advice. But you don’t have to be a genius to recognize the fact that with so much dislocation of value out there, there are going to be big opportunities to make money via distressed real estate assets.
Even though most predictions suggest it will be several full years before the hotel industry returns to pre-pandemic occupancy and revenue levels, the turnaround, when it comes, is expected to happen relatively quickly. A hotel isn’t like an office building with a 10-year lease. When people start traveling, hotel business will bounce back dramatically — virtually overnight.
While hotel investments have a lot of upside at the moment, it’s still not a good idea to invest any money in hotels you can’t afford to lose.
Even in good times, hotels are, in many ways, one of the riskiest real estate asset classes in which to invest. Last year at this time, we were in the ninth year of a historic recovery and a nearly uninterrupted stretch of prosperity, only to be hit by a global pandemic. And with the precise timing of the recovery still unclear, investors’ decision-making still hinges on a certain amount of educated guesswork. The “when” matters a lot in terms of how much you’re willing to pay for an asset.
While the pitfalls are very real, the rewards can be lucrative; the potential is there to make a huge amount of money if you invest strategically and thoughtfully — especially in places like Texas where the COVID-19 craters are less steep. One proven way to hedge your risk is to invest in hotel properties in markets where the rising tide of economic growth can carry you to new heights.
For now, hotel owners and operators need to confront a hard truth: They can’t manage, brand or refinance their way out of this. They’ve simply got to hang on until there’s enough of a recovery to make a meaningful difference.
The good news is that the recovery is inevitable. The passage of the second round of the Paycheck Protection Program alone will save a number of hotels. For all of the hiccups and complaints about vaccine timelines, people are getting vaccinated at decent clip (the United States is actually well ahead of Europe in that regard). And as more people get vaccinated and feel more comfortable going back to work and traveling, the economy will not only turn the corner, but also pick up steam.
For investors, there are some strategic benefits to being in the hotel space when the recovery happens. The ability to adjust rates daily means that hotels tend to do extremely well in inflationary environments relative to other assets. And hotels have also, by necessity, gotten dramatically better at controlling costs and (re)hiring employees who are willing and able to handle flexible, diverse and complementary operational responsibilities.
It feels like forever, but it’s only been 13 months. In the grand scheme of things, that’s just a blink of an eye. And as we move into the second half of 2021 and that eye catches sight of the growing light at the end of the tunnel, it’s clear that bigger, better and brighter things are in store for hotel owners, operators and investors.
— Prism Hotels & Resorts is a Dallas-based hotel management firm founded in 1983.