COVER STORY, JUNE 2012

HOTEL EXPANSION — TEXAS STYLE
The 10 most active brands are growing by leaps and bounds.
John Nelson

Holiday Inn Express has the most projects in Texas’ pipeline with 40 hotels that have either been planned, are scheduled to begin in the next 12 months or have already broken ground.

The hotel sector in Texas is poised to add a bevy of hotels, with more than 210 properties currently in the pipeline. The hotels are either under construction, set to begin construction within the next 12 months or are in the early planning stages. Holiday Inn Express has the most hotels in the pipeline with 40 total projects, according to Lodging Econometrics, a Portsmouth, New Hampshire-based research firm focusing on the hospitality sector.

Hotel construction experts anticipate deliveries to be minimal in the U.S., due to caution among construction lenders. This caution led to a shortfall of construction in 2011, resulting in supply growth of just 0.6 percent compared with 2010, according to Marcus & Millichap. In a survey conducted by Texas Real Estate Business late last year, only 9 percent of Texas-based lenders heading into 2012 considered hotels to be an attractive investment option.

However, widespread job growth in the state is expected to spur demand. Keith Phillips, a senior economist with the San Antonio branch of the Federal Reserve Bank of Dallas, forecasts that the state will add approximately 200,000 jobs in 2012, a 2 percent increase. Houston, Austin, Dallas and San Antonio are all in the top 10 U.S. metros with the greatest projected job growth, according to Marcus & Millichap. Researchers expect hotels in Texas to perform well this year because of business-related room demand and travel to leisure destinations within the state.

Texas’ hospitality revenue, like most things in Texas, is big. According to Smith Travel Research (STR), Texas hotels generated approximately $7.49 billion in revenue in 2011, up 12.5 percent from the prior year.

To increase the amount of supply available in the hospitality sector, hotel groups such as Choice Hotels International and InterContinental Hotels Group (IHG) are expanding the presence of their brands in Texas. Here’s a look at the Top 10 hotel brands in Texas’ pipeline, according to data compiled by Lodging Econometrics, featuring commentary from Rahul Bijlani and Michael Yu of Marcus & Millichap’s National Hospitality Group:

1. Holiday Inn Express (40)

IHG’s Holiday Inn Express currently has 40 projects in the pipeline for a total of 3,290 guestrooms. The brand has five projects under construction, 21 projects that will begin construction within the next 12 months and 14 projects in the early planning stages.

Holiday Inn Express is a favorite among hotel developers. It has been well represented in Texas markets, big or small. Overall, the brand delivers good returns to investors. The main drawback is that the brand features a relatively short 10-year license term.

2. La Quinta Inn & Suites (36)

La Quinta Inn & Suites has five projects under construction, 12 projects that will commence construction in the next 12 months and 19 projects in early planning for a total of 36 projects with 2,686 guestrooms.

La Quinta Inn & Suites is a homegrown brand. Since it franchised in the early 2000s, dozens of properties have been developed all over Texas. The brand delivers relatively good returns to investors and has a reputation as one of the most franchisee-friendly brands.

3. Comfort Suites (21)

Comfort Suites, franchised by Choice Hotels International, has 21 projects in the pipeline totaling 1,405 guestrooms. Choice has eight projects that will begin construction in the next 12 months and 11 projects in the early planning stages.

Comfort Suites is a flagship brand for Choice Hotels. It has seen tremendous growth in Texas during the last 10 years. This brand is favored by developers that are building 70 rooms or less. Its 10-year license with a 5-year window for termination has been problematic for some of its owners.

4. Candlewood Suites (19)

Candlewood Suites, also owned by IHG, has 19 projects in the works totaling 1,613 guestrooms. There are 12 projects that are slated to break ground in the next 12 months and 7 projects in the early planning stages.

Candlewood Suites is Intercontinental Hotels’ mid-market, extended-stay brand. Since it acquired the brand in the early 2000s, Candlewood has developed many new ground-up properties all over Texas.

5. Holiday Inn (18)

This brand has 18 projects in the pipeline totaling 2,190 guestrooms. Holiday Inn has 10 projects that will break ground in the next 12 months, seven projects in the early planning stages and one property under construction.

Intercontinental Hotels has been struggling over the years to get the Holiday Inn brand right. Due to the age of the brand, it has experienced significant brand-identity issues. A lot of old hotels have been pushed out of the brand during the past 10 years in Texas. Meanwhile, the new development pipeline has been affected by the recent financial turmoil.

6. Hampton Inn & Suites (18)

Hampton Inn & Suites, part of the Hilton family of hotels, has 18 projects in the works totaling 1,626 guestrooms. The brand has eight projects in the early planning stages, eight that will break ground in the next 12 months and two projects under construction.

Considered one of the best investments by a number of hotel developers, the Hampton Inn & Suites brand has seen tremendous growth during the past 10 years in Texas. It delivers good financial returns in most cases, and has been favored by institutional investors and private investors alike.

7. Hilton Garden Inn (17)

Hilton Garden Inn has 17 projects in the works totaling 2,406 guestrooms. There are three Hilton

Garden Inns under construction, nine in the early planning stages and five that will commence construction in the next 12 months.

One of the best performers in the select-service segment, the brand has been a favorite of larger developers and institutional players. Most of the primary and secondary markets in Texas have witnessed the construction of several new Hilton Garden Inns during the past decade.

8. Staybridge Suites (15)

IHG’s Staybridge Suites has 15 projects in the pipeline totaling 1,438 guestrooms. There are two Staybridge Suites under construction, seven projects that will break ground within 12 months and 6 projects in the early planning stages.

Staybridge Suites is the upper-extended stay brand by Intercontinental Hotels. Though the brand has performed reasonably well in most Texas markets, its performance usually trails the Homewood Suites and Residence Inn brands. Given the fact that construction costs are about the same as Homewood Suites and Residence, it delivers less-than-satisfactory returns to investors.

9. Best Western (15)

Best Western, owned by Best Western International, has four projects under construction, four projects starting in the next 12 months and seven projects in the early planning stage. The brand has a total of 15 projects with 978 guestrooms in the pipeline.

Developers of smaller hotels or hotels in rural markets favor the Best Western brand. Because of their fixed-royalty structure and the relatively cheap cost to build these assets, the Best Western brand has delivered good returns to Texas developers. Many have been built around the state during the last decade.

10. Courtyard by Marriott (13)

Courtyard by Marriott has 13 projects in the pipeline totaling 1,555 guestrooms. The brand has eight projects in early planning, three projects starting in the next 12 months and two projects under construction.

Courtyard by Marriot has a reputation as one of the best select-service brands. Mostly owned and developed by institutional players in Texas, it has seen modest growth in Texas during the last 10 years mainly due to Marriott’s more franchisee-friendly approach with respect to new development. Marriott took a great deal of interest in approving the sites as well as developers to ensure financial success for the property and owner. To develop and own Courtyard product has been the ultimate goal for several Texas hotel developers.

— Rahul Bijlani and Michael (Kaiyi) Yu are both vice president of investments and senior directors in Marcus & Millichap’s National Hospitality Group, based in Houston.

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