Oil, gas industry challenges put pressure on hotels

DoubleTree by Hilton Houston Intercontinental Airport front entrance

Despite oil and gas industry slowdowns, hotel analysts believe that the long-term hotel real estate outlook in major markets associated with these industries is still healthy.

Commenting on Houston, the epicenter of the oil and gas industry, CBRE senior managing director Randy McCaslin, said the brokers are not yet seeing an impact on hotel value: “It’s a global thing of oil prices, and what we’re seeing is that we are leaning toward a gradual increase in oil prices in 2017. We probably won’t get [to value impact] if that occurs.”

McCaslin, who is based in Houston, said that during the upturn the Houston market was so high in occupancy and so strong, now a lot of hotels are taking an opportunity to use the capital and the slower time to renovate.

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“It’s not seen as a negative time in Houston—and markets are preparing for the next surge,” he said. “If we get out of low oil prices and the economy gets cooking again, things can come back pretty quickly.”

McCaslin said more than 100 wells were drilled, but not finished.

“Once the oil price reaches around $55 to $60 per barrel, they can bring those wells back into production,” he said. “We feel we’ll see the market come back fairly quickly.”

Mark Woodworth, senior managing director, Americas research at CBRE Hotels, said supply is just now catching up to its long-term expectation in Houston.

“Even with significant supply growth, we think occupancy in Houston is going to stay above the long-term average and is going to get absorbed,” he said. “There are a lot of new rooms coming in, but there is a very significant cushion, aided by big events (Super Bowl 2017), enhancing capacity.”

Chart showing supply, demand and RevPAR numbers in various markets

In the macro picture, Woodworth said demand in the U.S. will increase.

“We reached the conclusion that overall more people will be renting hotel rooms nationally because of low energy costs, which is primarily leisure demand,” he said. “The industry had a record occupancy level last year. If our forecast holds, 2016 will be higher.”

Additionally, even if oil prices remain low until 2018, Moody’s Analytics predicts national employment growth will not be significantly impacted and may even improve, according to a 2015 report from Freddie Mac.

Eagle Ford Shale

However, in markets with less industry diversification, the slowdown can have a more significant impact on hotels, particularly when combined with aggressive supply growth in response to the oil and gas demand of recent years.

Jonathan Jaeger, managing director, LW Hospitality Advisors, conducted a study of areas affiliated with Eagle Ford Shale exploration and extraction in Texas where “previously nonexistent submarkets have blossomed and new hotel development has occurred throughout south Texas.”

But the EFS region, 30 counties in southern Texas, experienced the largest drop in production (510,000 barrels per day decrease compared to peak levels) out of all the shale areas in the United States, Jaeger said in his December update. He noted that the trend of overall lodging demand in these smaller markets appears to be correlated to drilling activity.

Checking in with these Texas markets during 2014 and Q3 2015, he found that many areas were at risk because of drops in lodging demand amid increased supply.

Speaking recently, Jaeger added: “We’ve seen a perfect storm in these markets with supply increasing; by September demand was down 4 percent, which wasn't bad. But for the fourth quarter and for the most part, and of course this varies market to market, things have gotten worse.”

Jaeger didn’t have a direct comparison for the EFS counties for Q4 2015, but for the 100 largest markets in oil and gas areas, year-over-year comparisons to Q4 2014 show that demand was down 6.7 percent, new supply was up 2.4 percent and revenue per available room dropped 12.8 percent.

Development has responded.

“Any projects that were well under way and under construction have all stalled or have been completely scrapped,” Jaeger said.    

San Antonio, which is the closest large market to the EFS region and saw some offices opened for the new project, will see impact but also has a booming technology industry, according to McCaslin.

In 2016, San Antonio is forecast to see a 2.9-percent increase in RevPAR, a 2-percent increase in supply and a 2.1-percent increase in demand, according to CBRE Hotels.

Taking Control

As for transactions in the EFS markets, it’s been slow.

Jaeger remained realistic: “At some point these markets will recover, perhaps not as strong as 2011-2013 when things were booming, but folks have stated we’ve reached a bottom in the market and there is nowhere to go but up. It very much depends on which market you’re looking at.”

He added that revenue management is still important.

“What is often overlooked in these markets is the importance of your operations teams,” Jaeger said. “Where RevPAR is down 10 percent, that doesn't mean each hotel is down 10 percent. If you have an aggressive sales manager that covets relationships with contracts, you can maintain business and gain share during a downturn.”

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