Austin offers diverse demand drivers, but developing in the market is costly both in time and money.
REPORT FROM THE U.S.—Developers are eyeing Austin, Texas, a market that offers a diverse set of demand drivers primed for operational success and growth. But, high barriers to entry and costs might be keeping them at bay.
“Austin is booming. It’s continuing to garner attention for both business and leisure travel, and for good reason,” said Brian De Lowe, president and co-founder of Proper Hospitality, which is developing the Austin Proper Hotel & Residences debuting this June.
He cited several demand drivers leading the charge in the market, including software giants such as Facebook and Google housing headquarters downtown, Apple expanding its Austin space with up to 10,000 new employees, and Oracle adding a downtown “live-in” campus with room for up to 10,000 employees.
Vijay Patel, president and CEO of Humble Origins Hospitality Management and a board member on the Austin Hotel & Lodging Association, said Austin is finally getting the attention it deserves as a destination.
“People are recognizing the quality of the city, its liveliness, music scene, weather, high-tech jobs and beautiful hill country,” said Patel, whose company has six branded hotels either open or under construction in the city, including the Aloft under construction near the airport, set to open in July; a TownePlace Suites by Marriott coming to the central business district; and a Homewood Suites by Hilton in early stages of development for North Central Austin.
The artsy scene is also helping to drive demand to the market, De Lowe said, pointing to Austin’s rank as one of the top 10 film production cities in the United States. Additionally, the city has seen success from festivals South by Southwest and Austin City Limits, which has shed visibility on the city as viable for hosting such events. In turn, festivals such as Cota race track’s Formula One Grand Prix and MotoGP, Rot Rally and the Austin Film Festival have all found their place in the market, he said.
Beyond those drivers, De Lowe said that Austin has become a top wedding destination due to mild weather, hill country and a plethora of indoor and outdoor venues to host. Meanwhile, he said that the convenience of the airport, solid city infrastructure and the convention center all help to attract year-round corporate meetings and events.
“It’s a very hip market,” said Jan Freitag, SVP of lodging insights at STR, parent company of Hotel News Now. “A lot of people are also moving there, and that’s what drives the economy and development.”
Development in Austin
Freitag said that the city has seen its fair share of hotel development over the past few years. Austin saw supply increase 6% in 2015 and 6.5% in 2016, he said. In 2017, supply in the market grew just under 6%. Compare that to a national average in supply growth of about 2%, and there’s certainly a story that begs to be told.
According to STR pipeline data as of December 2018, the greater Austin market had 35 hotels with 5,291 rooms under construction. With another 74 hotels with 7,666 rooms in the final planning and planning stages, the market is set to keep experiencing a supply boom.
“Something is going on there,” Freitag said. “A large part is the market’s high occupancy, which used to be very strong.”
Looking back to 2015, occupancy for the Austin market stood at 73.7%, according to STR. By 2018, that metric had dropped 2% to 70.3%. Last year, average daily rate increased 1.1% to $140.76, while revenue per available room declined 0.9% to $98.89.
“There have been so many projects that have come online in Austin over the last three years that were in the development phase five years before,” Patel said. “It takes a long time to get a permit and start construction and then open here.”
He said although Austin has added a lot of rooms, the market has stabilized. Meanwhile, it is getting more difficult to put new hotels in the central business district due to site and brand constraints, height variances, development challenges, contingency funds and fees. He said developers today would have more luck building around Austin due to lower cost of land, brand availability and allowance for a shorter project duration.
De Lowe said that Proper executives decided to develop because they saw a need for a luxury hotel in the city. The site was also a selling factor, located in the southwest corner of downtown, in the heart of the 2nd Street District. What’s more, Facebook and Google have headquarters situated on the blocks surrounding the future hotel.
But for those looking to develop in Austin now, Patel said, “bring a bag full of cash and a lot of patience.”
And for those looking to buy? “There aren’t a lot of sellers in the marketplace,” he said. “And the costs of building are trading above what market rates are, so it’s a unique market in that sense. Outsiders have a hard time understanding why assets trade for so much until they go out and try to develop a hotel on their own.”
As opportunistic as Austin seems for hotel owners and operators, sources said the market isn’t without its challenges.
Patel said an expansion of the convention center is needed.
“Ten years ago, it was too large and there weren’t enough hotel rooms to meet its demand. Now we have plenty of hotel rooms and the convention center is too small,” he said, adding that the space needs to increase by about 50% to accommodate demand.
“Dell had to move its conference from Austin to Las Vegas, and that tells you everything,” he said.
De Lowe said the biggest challenge for the city is a similar story to many markets across the U.S., especially booming ones like Austin: a lack of skilled labor.
“The combination of an extremely tight labor market with an explosion of hotels, restaurants and bars in Austin has made it very difficult to hire skilled hospitality teams,” he said. “I personally spend a good portion of my days meeting people, recruiting, interviewing and ensuring we not only attract but retain the best talent at our company.”
However, despite some challenges, sources said they feel good about Austin’s chances during a downturn. Patel pointed to the city’s diverse economy as a saving factor and cited 2008, when the market “took a little blip but nothing significant,” as an example of how well Austin would fare.
De Lowe agreed that a diverse makeup for the market would help it stay afloat during a downturn.
“There is no guarantee during a downturn, but we feel that Austin would fare as well as any market in a downturn due to its diversification of industries such as government (Texas State Capital), education (UT Austin), technology, biotech, health care, media, marketing and film that feed the city and support travel and spending in Austin,” he said.