Commercial BUZZ - July 2010
Comments from Bruce Walker of Source Strategies, Inc., at the O’Connor & Associates Hotel Forecast Luncheon:
Bruce Walker told his audience that he had a gloomy forecast, and that although he thought the hotel industry’s operating results statewide had bottomed out, return to the revenues which existed before the onslaught of the recession may take five to six years.
Texas has 8% of hotel rooms in the US. He projects a 3% annual demand growth for the next few years, but since we are off almost 20% in revenues from pre-recession times, it will take a long time to climb out of the ditch.
The biggest hit has been to hotels that charged over $135 per night, and the lightest hit has been to hotels that charged under $90 per night. This statistic must be taken with a grain of salt, however, since many hotels which formerly charged higher rates have sharply lowered their rates to maintain market share, and thus have placed themselves in a lower rate category.
Revenues in Houston area hotels have fallen now to 2005 levels, and new hotels, financed before the recession, continue to open for the moment, but Walker sees addition to new rooms supply falling to near zero in the immediate future.
In addition, he is doing a study on older hotels and the rate at which current conditions will force them to close or to be used for other purposes, thus reducing the supply of hotel rooms on the market.
Some of the following factors should act as a brake to hotel revenues and to the business travel which feeds them:
• Failure of federal stimulus to shock the economy back to normal
• Large hangover of unemployment
• Large government deficits and the uncertainty about how they will be cured
• No effective energy policy
• Pending reduction of government employees at all levels of government
• Insolvent government at different levels
MetroStudy presented an update on the Houston economy at a recent CCIM luncheon. Among the points made were:
• Houston is much better off than most other markets in the US
• The US economy now has had three quarters of expansion
• Recovery must start with job growth, which will create the next generation of home buyers
• The rate of job shrinkage nationally is down by 2/3 from its peak
• We are going through a ‘recession on steroids’
It was pointed out that nationally 1999-2009 was the ‘lost decade’ with respect to job creation, since we now have 1 million fewer jobs than ten years ago.
But in Texas, we have created 1 million more jobs over these same last ten years.
And in Houston, job growth in the decade just ended was almost as good as that of the 1990-2000 decade. As for 2010, with a little luck, Houston will gain 15-20,000 jobs.
In 2011 national housing starts will be up to about half of what they were during the “caffeine induced growth”, in say 2006. It looks like we have bottomed out in housing starts but the rate of recovery is hard to estimate, since there are so many hurdles and unknowns…think lack of credit, foreclosures, etc.
In Houston, we have maintained ‘equilibrium’ in MLS listings of about six months supply for the last two years, and therefore we have not had wide valuation swings in homes. We have fallen from 50,000 new residential starts at the peak to 18,000 at the bottom, and now are up to an annualized 20,000 starts.
We may have a severe lot shortage in Houston by 2011 in certain classes of lots, since absorption is taking place faster than new lots are being readied.
While there has been wild fluctuation downward in many markets nationally in home values, all Texas markets have had either positive value growth, or have remained flat. This is largely due to:
• Rational approval processes for new residential development
• Supply meeting demand in rational and timely fashion
Our economic recovery will be slow, fragile, and sloppy, with lots of ‘trip wires.’ The audience was directed to an article in the June 7 issue of Forbes, which is summarized below.
Comments on Houston by Joel Kotkin in the June 7 issue of Forbes Magazine:
“Innovation, job growth, and immigration put this Lone Star city ahead of New York and Boston…if you want to see successful 21st-century urbanism, hop on down to Houston and the Lone Star State. You won’t be alone: Last year Houston added 141,000 residents, more than any region in the U.S. save the city’s similarly sprawling rival, Dallas-Fort Worth…So what does Houston have that these other cities lack?
Houston…has kept the cost of government low while investing in ports, airports, roads, transit and schools. A person or business moving there gets an immediate raise through lower taxes and cheaper real estate. Houston just works better at nurturing jobs… A big factor has been that manufacturing, professional services, international trade and technology industries have been the primary drivers of the city’s economic growth-rather than construction and speculation….
Ultimately it is ambition, not style, that sets Houston apart. Texas urbanites are busy constructing new suburban town centers, reviving inner-city neighborhoods and expanding museums, recreational areas and other amenities. In contrast with the recession-battered places like Phoenix, Houston remains remarkably open to migrants from the rest of America and abroad.
Houston, perhaps more than any city in the advanced industrial world, epitomizes the Rene Descartes ideal applied to the 17th-centurn entrepreneurial hotbed of Amsterdam-of a great city offering “an inventory of the possible” to longtime residents and newcomers alike. This, more than anything, promises to give Houstonians the future.”
(Hankamer: It is worth reading again this last paragraph…note the phrase “perhaps more than any city in the advanced industrial world.” Pretty strong statement!)
You may contact Ray at rhankamer@aol.com
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