Austin Sounds the supply alarm

Austin has been in the spotlight for a few years now, having emerged as one of the top relocation destinations during Covid. Much of this was due to tech company expansion and a new work-from-home cohort who sought cheaper prices, more space, outdoor recreation and a solid culture.

All this attention added 121,121 new residents to Austin between 2020 and 2022, a 5.3 per cent increase in population, per the Census. Existing and incoming residents weren’t the only ones who suddenly had a newfound, pandemic-prompted appreciation for Austin, however.

Visitors and hotel investors did as well.

RevPAR was up 12 percent year to date in October 2023 when compared to October 2019, according to data supplied by Visit Austin. The annual daily rate (ADR) is also up 19 percent over the same period. These are significant statistics, as there has also been a 26 percent increase in the number of hotel rooms in the city during this time – a number that shows no signs of slowing down.

“Austin has been a robust hotel development market for at least the last decade, and no hotel projects were halted due to COVID,” says Visit Austin in a statement.

A boom in rooms

As it stands now, the city has nearly 160 hotels that boast 100 or more rooms, according to the Austin Convention Center.  More than 6,000 rooms have been added since 2019, with another 40 hotels set to open by 2027.

T. Dupree Scovell, managing partner and CIO of Woodbine Development Corporation, can see the attraction for hotel investors.

“The biggest advantage is the diversity of the demand drivers – leisure attractions, state landmarks, colleges, sporting events like Austin FC (soccer), the University of Texas (football), NASCAR and the significant corporate office presence in the Central Business District, which is led by the tech industry,” he says. “There are also many citywide events like SXSW (South by Southwest), Austin City Limits and Formula One racing.”

Woodbine has certainly been bullish on the area. The investment, development and management firm has had a hand in the Hotel Magdalena, as well as the Hyatt Regency Lost Pines Resort & Spa in nearby Bastrop, Texas. It also purchased The Driskell, a 131-year-old hotel in downtown Austin’s Sixth Street Entertainment District, from Hyatt Hotels & Resorts last May. The ownership, which includes Pixiu Real Estate and a local investor group, plans to elevate and enhance the historic property through a capital infusion.

Other hotel groups have also been hard at work in Austin. ASAP Holdings, which purchased the 298-room Radisson Hotel in the St. Johns neighborhood in 2022, has submitted plans to redevelop the hotel under the four-star Delta by Marriott brand. Graduate Hotels plans to debut the 18-story Graduate Austin near the University of Texas in 2025, while a 17-story citizenM hotel is being erected on the corner of Colorado and 7th streets that should open this spring. A new Rainey District mixed-use project will include the 251-room 1 Hotel Austin, which is scheduled to open in 2026.

Speaking of openings, Pacific Hotel Austin LLC premiered the upscale 212-room Cambria Hotel in downtown in October. Like Scovell, David S. Wood, co-principal of Pacific Hotel Austin, is a long-term believer in the city.

“Austin has always been an early trendsetter and adaptor of innovation,” he says. “New brands and venues thrive here. In fact, few cities have so many homegrown businesses…But despite the city’s phenomenal growth and change, it still retains its unique vibe and charm.”

Downtown may soon see even more options as a dual-branded Hilton hotel has been proposed. The project would include an Embassy Suites and Tempo by Hilton, adding another 489 rooms to the area.

The space in and around downtown is getting so crowded, in fact, that the planned Aloft/Element hybrid hotel tower will not include any parking, per the Austin Business Journal.

Room for one more?

Now that the pandemic and its boom have come and gone, many are wondering if Austin has enough sustained activity to fill all these new and upcoming rooms.

Scovell isn’t sure.

“The occupancy level will struggle to return to 2019 levels with that many rooms to fill,” he says. “It will take time for demand to catch up as well.”

Occupancy is down 6 percent from year-to-date October 2023, compared to October 2019, Visit Austin notes. The authority reports, however, that 2023 was a record year for room demand, with 7.23 million rooms sold citywide through October.

Scovell adds that hotel development has been particularly strong in the luxury and/or upper-upscale class, with 70 percent of new projects fitting these categories. This increased competition means owners and managers need to discover what differentiates their assets from the other offerings.

It’s an exercise Scovell and his partners have carried out on the Driskill.

“What are the strategies to maintain marketshare? I'm not sure, but the Driskill is one of one in terms of its market position,” he says. “With that said, we are still in a crowded field. So, at the end of the day, our people and the service they provide are going to be the difference.”

Current development levels aside, some say the tide may be turning in Austin’s hospitality market. The 1,048-room Fairmont Austin hit the market in June, but a sale has yet to be announced. Meanwhile, the downtown development site for Intracorp’s planned Conrad Hotel and Residences was listed for sale by CBRE in September.

Even the city’s famed SXSW festival has shown some weakness. Occupancy at this year’s 10-day event stood at 77.6 percent. That rate was 80 percent in 2022, according to CoStar company STR, and 86.5 percent during the 2019 festival (SXSW took a two-year COVID hiatus).

“A glut of hotel rooms could have played a role in the Austin hotel industry’s performance during SXSW 2023,” notes a CoStar report. “New room supply exploded in the past few years for both mid- and upper-tier hotels, causing an overage of rooms, despite increasing demand.”

The report added that a rising ADR may have also altered traveler sentiments, thereby decreasing occupancy and the duration of stay, especially among mid-tier hotel travelers.

There is also competition from short-term rental (STR) sites like Airbnb. The city had more than 12,000 available short-term rental listings in November, a 14 percent year-over-year increase, and a 30 percent increase from November 2019, according to AirDNA. Bram Gallagher, an AirDNA economist, notes these rentals continue to pop up in Austin due to a few factors.

“Austin is outperforming some other major cities like New York, San Francisco and Los Angeles, which have not been able to recover from the pandemic as they were previously so dependent on international travelers,” he explains. “All of these cities have also been heavily limited by short-term rental regulations, which do not allow supply to grow. Austin’s STR regulation was found unconstitutional in federal court in August.”

Then there’s the $1.6 billion Austin Convention Center renovation that will close the facility to conferences from 2025 to 2029.

“The convention centre renovation will create a major challenge for hotel owners over the next several years, especially for big-box convention properties,” Scovell admits. “It will limit the citywide events and overall compression while new supply is still being added to the market.”

But the key question is whether this renovation has hampered his outlook on Austin and its long-term success.

““It will certainly influence investment decisions down the road, but it’s probably a little early for that right now,” Scovell continues. “Even if groups wanted to sell now, there isn’t much of a market to do so. Once we get to the other side, the new convention center will have an enormous positive impact on the city and downtown.”