FEATURE ARTICLE, NOVEMBER 2008

The Middle is Just Right
Texas’ medium-priced hotels are on the rise.
David Pinson

In the current financial climate, the number of high-end hotels coming out of the ground has slowed due to financial institutions asking for larger equity investments of 35 to 40 percent, which is an increase of 15 to 20 percent from previous years. Due to this, Texas is now seeing a rise in the construction of medium-priced hotels that offer a wide range of amenities at a lower price point.

Hotels currently in the market are still fairing well, but with tightened credit, an overall decrease in travel spending, and rising cost of construction materials, hotel developers must ask themselves if investing in building a new hotel is a wise decision.

Before the Crunch

In 2006, the Texas hotel industry was thriving. People were traveling for both business and pleasure, which kept hotel occupancy rates high. In San Antonio, hotels reported 75 percent occupancy, the highest level in more than a decade. Hotel developers were enjoying an increase of revenues on available rooms of 19.5 percent. These high percentages lasted until the third quarter of 2007 when the hotel industry began to feel the effects of the faltering economy, brought on by the subprime mortgage meltdown.

By the end of 2007, occupancy rates had begun to slip, but the supply of  hotels continued to increase in Dallas and other Texas cities. This increase added to the more than 96,400 rooms already in Dallas, signaling more rooms were being added than needed. This caused the occupancy rate to go down more than 2.4 percent in the third quarter of 2007 alone.

A Changing Perspective

Now, as 2008 comes to a close, the percentages are telling a similar tale of having the supply, but not the occupancy levels, thanks to a weak travel market. Several companies have started to use more telephone and videoconferencing to save money. Those who are still traveling now seek less expensive hotels that are in convenient areas near major transportation. Most companies are no longer shelling out $300 for a room, opting instead for medium-priced hotels.

In regards to personal travel, families also are leaning toward medium-priced hotels because these are more family friendly and cost effective. High-end hotels have transitioned over the years to be more of a destination for special events such as reunions and honeymoons.

During the second quarter of 2008, luxury, upscale, suites, and extended stay hotels had a decreasing occupancy rate and rising room rate, according to Source Strategies’ Texas Hotel Performance Report: Second Quarter 2008. In order to maintain occupancy rates, these types of hotels had to offer discounts to make cost margins work.

High-End Slowing, Medium-Priced Growing

The state of the financial industry has put several of the types of projects mentioned above on hold because financial institutions are skeptical about issuing commercial development and real estate loans. With volatile construction costs, including steel and concrete prices that increased $25 a yard in August, and the price of higher-quality materials like granite and marble, the original budget can go out the window in a hurry. The economics of high-end hotels simply do not work in the current financial climate.

Developers and owners instead are leaning toward building medium-priced hotels. During the second quarter of this year, revenues on rooms above or at $90 have grown. The number of rooms being built in the $90 to $135 range have gone up 11.7 percent, or 8,900 rooms, and those with rates of $135 or more have risen 17.1 percent, or 9,600 rooms, since this time last year, according to the Source Strategies report.

Medium-priced hotels are built with quality materials, but they might not have the granite countertops found in high-end hotels. In order to cut down on structural costs, the ceilings are often not as high. Meeting spaces, conference rooms and common areas are not as large. Medium-priced hotels often are found in areas near restaurants and bars, so a full-service kitchen and bar is not necessary. Instead, guests can enjoy breakfast buffets or happy hours with wine and hors d’oeuvres at the hotel. 

One example is the new Sheraton Stonebriar Hotel in the Stone Commons Retail Center on Legacy in Frisco, Texas. This $10.8 million, 120-unit, medium-priced hotel has been overwhelmingly successful with rooms filled before construction was even complete. This hotel is strategically located near heavily congested areas, such as the airport and several large corporate campuses. The Sheraton’s success has prompted the developer, Legacy Stonebriar Hotel II, LP to build an additional 120 rooms, expand the public areas, and build a 30,000-square-foot conference center, in partnership with the City of Frisco, and a free-standing parking garage.

What the Future Holds

Another way developers and owners are saving money for high-end and medium-priced hotels is through renovating older hotels. This can be seen in downtown areas like Dallas, where the former Adam’s Mark is being converted into a Sheraton. This is much more affordable than building from the ground up because the skeleton of the hotel is already in place.

In terms of the overall hotel market in Texas, it is hard to say when it will be back to its prime. Some financial analysts say the first quarter of 2010, but with the changing economy and the financial crisis continuing to unravel, it is hard to tell. Luckily, the Texas hospitality market has been able to dodge some of the economic downturn because it is diversified in its offerings, with a healthy range of both medium-priced and high-end hotels.

David Pinson is the president of the Dallas division of Walton Construction Company LLC.

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