As the majority of hotels in Houston and across the nation continue to struggle, their taxable value is coming into question.
Appraisal districts gave limited consideration to the impact of COVID in 2020 indicating it would be reviewed in 2021. Now that 2021 is here, there should be significant value reductions.
The financial pressures of the downturn in energy prices coupled with the widespread impact of the coronavirus pandemic have left the Houston hotel market more distressed than other big cities.
An estimated 4,600 energy-related firms are based in Houston. The downturn in the energy market translated into less business travel and declining hotel profits even before the pandemic began. In addition to the decline in business travel, Houston lost many energy-related conventions and events in 2020 that area hotels depended on.
Hotels in different submarkets have experienced the pandemic differently. Downtown Houston and Galleria assets, which typically cater to business travelers, have had lower occupancy levels during the pandemic than suburban hotels.
According to HVS, Houston hotel occupancy declined from a 2019 benchmark of roughly 63% to 42% in 2020 indicating a 21-point decrease. Average daily rate (ADR) declined from $102 to $81, which reflects a 20% drop from 2019 to 2020. Revenue per Available Room (REVPAR) is down 47% market wide. The market is expected to see a small rebound by the fall of 2021. A stabilized occupancy in the mid 60s is forecast to return by 2024.
Source: STR (Historical Years) and HVS (Forecast)
Delinquencies Rise – Values Fall
The number of delinquent hotel commercial mortgage-backed securities (CMBS) loans that have been transferred to special servicing nationally is at the highest level since the aftermath of the Great Recession.
Houston’s hotel delinquency rate sits at 73% compared with the national average of 19.8%. Some CMBS hotel properties in Houston are being reappraised at discounts of up to 60% of their original issuance appraisals.
Analysts don’t believe these types of discounts will materialize throughout the entire market. There is still hope that with the vaccine, there could be a reversal in travel volume that would bring business back to hotels.
The financial challenges facing hotels provide unique appeal opportunities this year. Thorough documentation can help individual properties prove their case for a reduced taxable value.