The following HVS Market Intelligence Report focuses on the hotel markets and economies of Midland and Odessa in West Texas, a region that also comprises the major cities and metropolitan areas of El Paso, Lubbock, Abilene, and San Angelo. The region, though vast, is one of the least densely populated stretches of the state, with an economy historically dependent on the ranching industry. The oil boom that began in the early 20th century significantly refigured the economic landscape of West Texas; the current oil and gas boom and the emergence of the alternative energy sector are driving strong economic and population growth, as well as extraordinary levels of hotel demand throughout the region. The Midland/Odessa area, which serves as the unofficial headquarters of the West Texas oil and gas industry, is a major force behind this growth.
Major industries in West Texas include livestock, petroleum and natural gas production, and textiles. West Texas has also become known for being at the forefront of alternative energy innovations. The region’s vast network of wind turbines accounted for 9.2% of the electricity generated in Texas in 2012. The economy of El Paso, primarily built on industrial businesses, has begun to diversify into the business-services and healthcare sectors; call centers in El Paso are being expanded as well. Lubbock is home to Texas Tech University and is an important cotton-growing center, while Abilene’s economy is based on healthcare, military/government, and wind-energy entities. San Angelo is home to the Goodfellow Air Force Base, and the city is experiencing growth in the education, healthcare, trade, transportation, utilities, leisure and hospitality, and business-services sectors.
The sister cities of Midland and Odessa serve as a regional center for commerce, higher education, retail, and health care for the Permian Basin area. Although the oil and gas industry remains a cornerstone of the market, the economies of Midland and Odessa are becoming increasingly diverse with expansions into finance, healthcare, and education. The following table illustrates historical employment, population, and income data for the overall Midland/Odessa market.
HISTORICAL EMPLOYMENT, HOUSEHOLDS, POPULATION, AND HOUSEHOLD INCOME STATISTICS
The oil and gas industry remains a cornerstone of the market, and new technological advances and high crude oil prices have resulted in a boom in drilling and exploration in the area over the past several years. The alternative energy sector is also gaining momentum. In October of 2011, the Department of Energy announced that $450 million in federal funding has been approved to help build the Texas Clean Energy Project, which is being developed by Summit Power Group. The $2.5-billion energy facility will be located in Penwell, 15 miles west of Odessa. During construction, the plant is anticipated to create 2,000 jobs, with approximately 200 permanent jobs expected after the project’s completion. Forbes recently ranked Odessa and Midland first and second, respectively, in terms of job growth among 398 metropolitan areas. This boom is resulting in higher-than-average wages and stiff competition for employees, as well as a severe housing shortage.
The following table illustrates combined unemployment statistics for the Midland/Odessa MSA, the state of Texas, and the U.S. as a whole from 2002 to 2011.
UNEMPLOYMENT STATISTICS – MIDLAND/ODESSA
The energy-sector boom cycle underway in Midland and Odessa has positively affected new home starts, hotel room nights, and the local economy as a whole. The Permian Basin is estimated to hold approximately 29% of projected oil-reserve growth in the U.S., and the current boom is expected to last another 10 to 20 years; oilfield-services giant Halliburton is one of the area’s largest employers.
The surge in energy-related employment has boosted employment in virtually every job segment, including construction, trade, hospitality, and business services. This has brought Midland/Odessa’s unemployment rate down to less than half that of the national average.
Office Space Market Update
The following table details the Midland/Odessa market’s office space statistics, which are important indicators of a market’s propensity to attract commercial hotel demand.
OFFICE SPACE STATISTICS – MARKET OVERVIEW
The CBD office submarket realized an increase in demand in 2012, with the vacancy rate falling to 7.3% and asking lease rates noting a positive trend; by comparison, the Non-CBD submarket’s vacancy rate was more than three times that of the CBD. The vacancy rate for the entire metro area is expected to drop below 12.0% in 2013. Gains of 1.0% in average rents in 2012 should be followed by higher growth rates in 2013.
Hotel Construction Update
According to HVS research, 13 hotels have opened in this market since 2009, with 14 new hotels currently in the development pipeline, as summarized in the following tables.
HOTEL OPENINGS SINCE 2009 – MIDLAND/ODESSA
DEVELOPMENT PIPELINE – MIDLAND/ODESSA
The energy-sector boom in this region is driving the construction of new supply in the market. The hotel projects currently under construction, along with others in the planning phases, amount to a large increase in supply that is influencing the dynamics of the area’s hospitality sector. As an alternative form of temporary housing, many energy companies have resorted to “man camps,” which offer barracks-style housing with basic rooms and a kitchen or cafeteria for oil workers. Of note, the saturation of branded hotels in the Midland/Odessa market has brought on an increased number of independent hotels.
Outlook on Market Occupancy and Average Rate
Markets that have realized extraordinary growth in demand driven by energy exploration and oil drilling often experience increases in single- and multi-family housing construction in order to accommodate the growing labor force, which generally results in deflated hotel demand levels. A similar pattern is expected for the Midland/Odessa market; as a result, HVS expects market-wide occupancy to return to a more normalized level going forward. In the near future, we anticipate that project-related oil and gas demand will stabilize and market-wide average rates will thereby decrease.
Recent Hotel Transactions
Hotel transactions that have occurred in the state since January 1, 2011, are summarized in the following table. Transactions within West Texas are highlighted.
REVIEW OF HOTEL TRANSACTIONS
REVIEW OF HOTEL TRANSACTIONS - CONTINUED
A steady pace of deals occurred during the last few years, crossing a variety of market segments and acquisition opportunities. The sales represent acquisitions of stabilized assets by institutional investors, as well as repositioning opportunities for entrepreneurial owner-operators.
HVS interviewed several brokers familiar with West Texas markets and with Midland and Odessa in particular. These brokers revealed that very few hotel transactions have occurred since the most recent oil and gas boom began. Given the high occupancy and average rate levels of these markets, hotel owners are realizing profit levels that leave little motivation to sell their properties. While sales activity has been almost non-existent for hotel properties, there has been a flurry of development activity, and land prices have increased to between $5.00 and $9.50 per square foot in Midland/Odessa.
While many areas of the country are experiencing a slow but steady recovery from the recent recession, the Midland/Odessa economy is booming. Falling oil prices have hurt the market in the past; nevertheless, some economists believe technological improvements will result in increased energy production over the long term, coinciding with higher levels of energy demand from emerging nations. Therefore, while it is unlikely that hotels in Midland, Odessa, and other West Texas markets will continue to experience exceptionally high occupancy and rate levels indefinitely, the near-term outlook remains very optimistic.