UNLOCKING THE HOTEL BOOM

What’s the key to hospitality construction in the Dallas Region?



When the city of Roanoke announced in late June that it would become home to a new 300-room luxury Peabody Hotel, it was the latest sign that there’s a hotel boom underway in Dallas-Fort Worth.

It’s a boom that will bring scores of new facilities, thousands of new rooms, and jobs for the legions of people hoping to find work in the hospitality industry. 

Much of that boom is tied to the region’s growing economy and driven by corporate relocations, but it’s also the result of an industry playing catch-up from previous years’ lack of supply. 

The economic growth is visible to all those traveling DFW’s roadways.

“Driving north on the (Dallas North) Tollway, a personal game I play is to count how many cranes I pass,” says Jeff Binford, director of  CBRE Hotels’ Consulting. 

Binford says he saw upward of 17 cranes at one point, particularly in West Plano and Frisco.

“I’m seeing a lot of activity from folks trying to build in those areas,” Binford says. The boom is the result of new development and corporate relocations, such as Toyota Motor’s new headquarters in Plano. 

It’s the same situation in the hotel industry. There are many hotels that opened recently, are in the planning stages, or already are under construction throughout the region. 

To get a clear picture on what is happening in the DFW hospitality sector, let’s check into some of the activity underway in the region.

The 224-room dual-branded Aloft and Element hotels recently opened in the 37-acre West Love development near Dallas Love Field. New hotel projects are underway in Irving, including a Westin adjacent to the convention center, and throughout Dallas and Fort Worth, especially within Dallas’ Central Business District and the Dallas Arts District. An $80 million, 240-room Virgin hotel is underway in the Design District of Dallas. In Fort Worth, you’ll find activity along West Seventh Street.

Also, green-lit are a Marriott Autograph Collection hotel-conference center in McKinney, a Delta Hotels by Marriott Dallas and Watters Creek Convention Center in Allen, and more hotels in Grapevine. Further west, a new Cambria hotel and Suites opened in Southlake. In the town of Trophy Club next door, several hotels have opened, such as Hampton Inn & Suites and Homewood Suites by Hilton. Others are under construction, including a Holiday Inn. An Aloft hotel is planned in Beck’s Trophy Club Town Center development. 

The $5 Billion Mile in Frisco, anchored by the Dallas Cowboys’ mixed-use complex, The Star, has plenty of planned hotels, as does Plano’s Legacy West mixed-use project.

And, in Arlington, the massive Texas Live! development, to be anchored by the Texas Rangers’ new stadium, will have a 302-room hotel as part of the $250 million project.

Not far away, Drury Development Corp. of St. Louis wants to put in a nine-story hotel in the Arlington Entertainment District. 

Those are the “main-liners,” the projects that are making the headlines, and don’t include the hotels that are undergoing renovations, or those that aren’t part of a massive mixed-use development.

In June, for example, a Las Vegas investor announced it bought the 241-room Regency Hotel in North Dallas with plans to upgrade the 150,000-square-foot facility.

Dupree Scovell, managing partner and chief investment officer with Woodbine Development, says the overall DFW fundamentals — corporate relocations, job increases, and previous low supply — are driving hotel development across the region. 

He says that corporate relocations and jobs are macro-level issues that are overlaid on the hotel sector, which he says is very much of a micro-level industry. 

“In reality, each site, each hotel developed, doesn’t follow that (macro) mandate through to the micro level,” says Scovell, who is with the company that developed the Hyatt Reunion and is working on the 128-room, boutique Dream Hotel in Dallas’ Uptown submarket. 

In other words, ground-level factors can play more of a role in hotel decisions than do the overall fundamentals of a region.

Woodbine, for example, focuses on several demand drivers before considering to build a hotel. Those drivers include proximity to an employment cluster, entertainment venue, or even an airport.

Such micro-focused issues make it difficult to paint the entire hotel industry with one brush. While resort hotels aren’t going to be near employment clusters or airports, business hotels, according to Hall Group Chairman and Founder Craig Hall, should be within walking distance to business areas and employment centers. 

Hall, whose company is building the 183-room Hall Arts Hotel in Dallas’ Arts District, says that the hotel is near employment clusters, while also being in an area focusing on leisure activities. 

“There aren’t that many sites that appeal to both sectors in the Dallas area,” Hall says.

Then there are niches within niches.

Medical hotels are trending, and Gatehouse Capital has partnered with Baylor Scott & White Health to build a 132-room hotel at Gaston Avenue and Hall Street at Baylor’s East Dallas campus. 

Gatehouse Capital CEO Marty Collins says that medical hotels need to be near medical campuses that offer plenty of hospital beds. 

“Real estate plays a role in hotel development, without question,” Collins says. “But just as important is matching the brand and the product with the customer. You could have the best location in the world. But if you have the wrong product, you have an issue.”

Meanwhile, Garfield Public/Private LLC’s 350-room Westin Irving Convention Center Hotel is going up next door to the Irving Convention Center and adjacent to the Music Factory development. The project relied on something totally different from proximity to business and leisure centers, or even hospitals. The BOKA Powell-designed hotel, which is being built in partnership with the city of Irving, is meant to boost performance of the Irving Convention Center. 

“A $130 million convention center without a hotel within walking distance created a sales hurdle for the convention and visitor’s bureau,” says Ray Garfield, chairman of Garfield Public/Private. “Dallas had a convention center for years without the Omni, and suffered in attracting conventions to the community.” 

BOKA Powell also is the architect on the Valencia Texican Court, a 148-room hotel planned for the southeast corner of West Las Colinas Boulevard and West Northwest Highway. It will be smaller of the two hotels to be built adjacent to the Irving Convention Center.

Adjacency to a convention center can be a favorable factor for hotel companies looking for prime locations.

For some developers, deciding to build depends on what’s going on in the submarket or neighborhood.

“It’s more than simply the hotel these days,” says Mike Garcia, president of Matthews Southwest Hospitality. “It’s what’s around the hotel if it’s part of a mixed-use development, part of an inner-city revival.”

And, finally, construction decisions might rest on aging inventory that needs to be replaced, not to mention that newer hotels are geared toward very different needs and travelers. 

“Twenty years ago, hotel lobbies were places to pass through. Today’s lobbies are places to hang out,” says Joe Champ, president with Champ Hospitality, which broke ground recently on a 126-room Aloft Hotel in Las Colinas. “Newer hotels have lobbies that are user-friendly, if you want to be social.”

Also, people simply like newer spaces. 

“It doesn’t have the same stigma the older stuff does,” Champ says. 

Many hotel developers like the Dallas-Fort Worth area simply because there are low barriers to entry. 

“It’s simply easier to develop here,” Scovell observes. “We’re seeing first-time developers making decisions that might not make a ton of sense.” 

It’s those “because we can” developers that have Scovell worried. 

“Those types of decisions don’t necessarily do force a disciplined underwriting process,” he says.

Such decisions, as well as the announced hotels and those under construction, can bring up oversupply concerns. The experts say that supply has outpaced demand. Metrics for the first quarter of 2017 issued by STR Global back this claim.

CBRE forecasts 70.1 percent occupancy in the Dallas metro area for 2017, and 69.3 percent occupancy among Fort Worth hotels, declines of 1.9 percent and 0.3 percent, respectively, from the previous year. In terms of pipeline and a lot of extra rooms, the West Plano-Frisco area is taking top honors.

Meanwhile, according to Lodging Econometrics, the pipeline for Dallas alone (consisting of rooms under construction and in the planning stages), totals 17,869 rooms across 141 properties. In 2017, Lodging Econometrics estimates 68 hotels will break ground, eventually delivering 8,616 rooms.

In 2017, it’s projected that 44 new hotels will open, adding 5,050 rooms to the market, a growth rate of 6.1 percent. 

However, before anyone rings the “oversupply” alarm, it needs to be remembered that there are many different hotel categories, ranging from “budget” or “economy” (limited-amenity properties and lower average-daily rates, or ADR), through midscale, upper midscale, upscale, and luxury.

Within those categories are a range of limited- to full-service amenities. There are also the destination hotels (resorts) and extended-stay hotels. 

The different categories have different numbers of rooms anticipated for delivery. Lodging Econometrics says that the bulk of new rooms coming to the North Texas market are anticipated to be midscale and upper-midscale hotels, especially in areas such as West Plano/Frisco/McKinney and Lewisville/Denton. Meanwhile, experts point out that there hasn’t been much full-service or luxury product added to the North Texas collection. 

Adds Matthews Southwest’s Garcia: “The limited service right now is outpacing the luxury builds, because it’s cheaper to build.”

Still, from the developer’s standpoint, Woodbine’s Scovell says that the industry for the area is in the late stages of the cycle.

As a result, Woodbine is pulling back from development and focusing more on acquisitions. Hall says his company is planning a hotel in its mixed-use Hall Business Park in Frisco — during the next economic cycle. 

“Because of the number of hotels in progress right now, we’ll wait for a while,” he says.

Matthews Southwest Hospitality is focusing on a few areas in North Texas in which “we’ve been asked to take a look to see if it makes sense to build a hotel there,” Garcia says. “It all gets back to what’s driving demand, and what is sustainable.” 

It’s this caution that is, in part, taking the sting out of the potential for oversupply. “There is some wait-and-see out there,” CBRE’s Binford says. “Everyone knows that new hotels are coming in, and they’re asking themselves if they want to come in with their own.”

As for the already-announced projects, “a lot of things get announced that don’t get built,” Hall says. 

Despite some undisciplined underwriting, conventional loans for hotels are not exactly easy pickings.  

Even if debt were freely available, it takes a while to see any kind of return, meaning the property sector is not for the faint-of-heart investor. 

“They have to wait upward of three years, between designs, entitlements, and contractor bids, to break ground,” Garfield says.

When construction actually begins, it will be at least two years before the hotel opens. Tack on to that an additional two years for the hotel to get heads in beds, to stabilize, and to generate consistent income. 

“You’re putting your money in year one, open the hotel in year three, and you can’t refinance, or put on a permanent mortgage, or sell the property until years five or six, at the earliest,” Garfield says. “Investors are extraordinarily cautious of taking that type of risk.”

As a result, “some of those high-end, full-service projects won’t get done,” Champ says. “There is a point in the cycle when underwriters won’t be able to project a 5 to 10 percent growth pro forma and won’t go forward with building.”

Meanwhile, Binford says the supply already under construction will exert downward pressure on occupancy and Average Daily Rate (ADR).

As a result, Binford continues, future occupancy and ADR metrics will settle down to historical trends, barring any devastating economic swings. The experts do point out that, if supply continues to be delivered at the current rate, there could be a glut. But not necessarily.

Overall, while there could be a few bumps here and there within the hotel industry, the macro signs, in addition to the micro conditions, continue to be robust. While hotel supply is outpacing demand, few experts are worried about a massive glut in the market. 

“I think the supply will taper off,” Garcia predicted. “The spigot won’t shut off, but things will slow down.”

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