Barron's | Super-Sized

Super-Sized - Barron's

11/18/15, 11:50 AM

Super-Sized ANY SUPER BOWL FANS WHO party too hard at Houston's Reliant Stadium Sunday will probably totter out of downtown hotels Monday knowing they'll feel better in a matter of days, if not hours. The hotels' owners, however, could be in for a longer spell of discomfort because of a glut of hotel rooms. But the situation could prove lucrative for patient real-estate investors, especially if a new drive to attract conventioneers pays off.

Over the past 14 months, seven hotels have opened downtown, with one more scheduled to debut this year. Its completion will boost the number of central hotels to 15, and the room total to nearly 5,000 -- close to three times the number 20 years ago, and the most downtown since the '70s, when there were more than 6,000. (Their ranks later were thinned after the '80s oil bust.)

In 2004, Houston is hosting not only the Super Bowl, but also Major League Baseball's allstar game, to be held at four-year-old Minute Maid Park (yes, the former Enron Field) this summer. While such mega-events help lure out-of-towners, the ballpark and the new Toyota Center basketball and hockey arena are bringing more local people downtown, with 300 nights of sporting events -- compared with zero just a few years ago, says William Franks, president of Spire Realty Group, a Houston real-estate investment and development company. It's hoped that all the activity will attract leisure and business travelers, too: suburbanites to spend weekend nights in downtown hotels, plus commercial, trade and political groups to fill the city's newly expanded convention center and hotel rooms.

That's why some investors are bullish on the downtown district, even if they have to endure some short-term pain, says Franks, whose company reopened the 100-room Sam Houston Hotel in 2002 after spending $14 million to restore the historic 1920s hotel.

Other new features on the cityscape include a 7.5-mile light-rail line that links downtown with the museum district and Reliant Stadium. Private investors have funded the Hobby Center for the Performing Arts, and a Roman Catholic cathedral. Developers also have added thousands of residential rental apartments and condominiums downtown, and some 65 clubs and restaurants. Landry's Restaurants developed the new, $21 million Downtown Aquarium, and opened the 202-room Inn at the Ballpark. A housing division of Kimberly Clark was a partner in the redevelopment of the historic Humble Oil building into http://www.barrons.com/articles/SB107551335893016914

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Super-Sized - Barron's

11/18/15, 11:50 AM

two Marriott hotels that opened last year.

But will Houston be able to regularly fill 6,000 rooms again -- the number officials assert will bring more major conventions to the city? Robust demand isn't there yet: The expanded downtown convention center and new convention hotel have seen only a slight uptick in convention business. Hotel occupancy downtown, which hovered around 70% in 1998 to 2001 -- thanks to the energy-trading industry -- plunged to 53.5% in late 2003 and is expected to fall to 52% this year before slowly recovering, according to the Houston office of lodging-industry research firm PKF Consulting. And revenue per available room (RevPAR), slid to $82.29 in late 2003, 24% below 2001's $108.83.

"Call it real-estate irrational exuberance," says downtown Houston hotel investor William Sharman, who has operated the 93-room Lancaster Hotel since the early 1980s. "It's going to be impossible to absorb the incredible increase in the supply of hotel rooms over the next two or three years, and there's going to be a lot of blood in the streets."

Long term, the picture is brighter. With more than 3 million residents, the Texas city is the nation's fourth-largest metropolitan area, and home to several Fortune 500 firms. And since 2000, private investors and government have dumped more than $2 billion into reinvigorating the central business district.

How did Houston end up with a hotel glut? The story begins in the mid-1980s, when the George R. Brown Convention Center opened downtown. At the time, only some 1,800 hotel rooms existed, and no hotel near the structure had more than 1,000 rooms. As a result, Houston leaders had difficulty booking major groups. So in the 1990s, they decided to build a city-owned convention hotel, after a search for a private developer proved fruitless. City officials also decided to expand the 1.15 million-square-foot convention center to 1.85 million sq. ft. In December, Houston completed that $165 million expansion and adjacent 1,200-room, $285 million convention hotel, the Hilton Americas Houston.

But the Hilton and existing hotels only supplied about half of the 6,000 rooms the city deemed necessary for making the convention center viable. So Houston offered to rebate part of a hotel-occupancy tax to developers who would commit up to 70% of a hotel's rooms for scheduled conventions. Six developers took advantage of the program, which lasts seven years; all renovated abandoned buildings.

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Super-Sized - Barron's

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The incentives, a booming energy business, and aggressive downtown redevelopment touched off a hotel-building boom. But then the energy-trading industry collapsed, and the hotels that were once full of business travelers suddenly were empty. Worse, any meaningful increase in attracting the number of major conventions Houston wants is still a few years away, despite the completion of the convention-center expansion and the convention hotel. Jordy Tollett, president and chief executive officer of the Greater Houston Convention and Visitors Bureau, says he anticipates raising the annual number of conventions to 34 over the next five years, from the current 20.

Eventually, Houston wants to raise that number to 40, and attract national rather than regional conventions. Tollett calls the goal achievable: In 2005, the city will host the 35,000-member American Association of Physicians of Indian Origin, he says. How many hotel investors will survive to see it, however, is unclear. The most likely scenario appears to be the one sketched out by Arthur Buser, a managing director of Jones Lang LaSalle Hotels in Los Angeles: "The smart money's going to watch hotels hit bottom this year and maybe next year," he predicts. "Then they'll move in, pick up some deals and ride the market to the top."

JOE GOSE tracks the national real-estate market from Prairie Village, Kan.

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