Commentary Diverse Drivers Will Help Austin's Hospitality Market Get Back in the Saddle
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Commentary
Diverse Drivers Will Help Austin's Hospitality Market
Get Back in the Saddle
DBRS Morningstar This commentary is part of a series providing insights on six U.S. hotel markets DBRS Morningstar views as
March 30, 2021
significantly exposed to the Coronavirus Disease (COVID-19) outbreak.
CMBS Regional Report: U.S. Hotels DBRS Morningstar Perspective
Austin
The pandemic triggered an unprecedented disruption to the hospitality industry in Austin, Texas, though
the city is better positioned for recovery than others. Austin, with its high population growth, attractive
business environment, and booming travel demand prepandemic, was among the hardest-hit cities in
the beginning. According to STR, occupancy for hotels in Austin’s central business district (CBD)
dropped to a low of 3.1% on April 4, 2020. Room bookings plummeted to 6% on April 11, 2020, down
from 99% the year prior.
Before the global pandemic, Austin saw strong population growth, posting a net population gain of 152
Contents
people per day from 2010 through 2019, according to the Austin Chamber of Commerce. Because of this,
1 DBRS Morningstar Perspective
1 Commercial and Group Demand the Austin market became one of the fastest-growing large cities in the country driven by the exodus of
2 Leisure Demand technology companies and workers from the West Coast to central Texas. Numerous global technology
3 CMBS Exposure
5 Prognosis for Recovery
giants like Apple, Facebook, and Amazon have major presences in the area, which makes Austin a
desired destination for business meeting and group events. Also, multiple major events, such as music
festivals, drive the city's leisure demand throughout the year, which may kickstart the hospitality
Nan Zhou
Author industry when these events return.
+1 312-244-7987
nan.zhou@morningstar.com
Commercial and Group Demand
Steve Jellinek Relocations and expansions from various industries drive strong demand for the commercial and group
Vice President – Head of Research hospitality segments in Austin. For the ninth consecutive year, Texas was awarded the 2020 Governor’s
North American CMBS
Cup by Site Selection Magazine for leading the United States in capital investment. Texas’ project count
+ 1 312 244-7908
steven.jellinek@dbrsmorningstar.com of 781 ranked first, far ahead of number two Ohio with 419 in 2020. Austin owns two of the top 25 Texas
projects, namely Tesla’s $1 billion gigafactory and BAE Systems, Inc.’s $150 million expansion. The
Erin Stafford
Managing Director
2,500-acre Tesla factory is under construction in Del Valle, southeast of Austin's CBD. The company
+1 312 332-3291 plans to manufacture its new electric vehicles including the Model 3 compact sedan and both the newly
erin.stafford@dbrsmorningstar.com introduced Model Y compact sport-utility vehicle and Cybertruck. Elon Musk, the company’s chief
executive officer (CEO), hoped to have the factory running by late 2021, according to the Austin
American-Statesman. The factory will create a minimum of 5,000 jobs directly and another 4,000 related
jobs, according to Austin Chamber of Commerce CEO Laura Huffman. For BAE Systems, Inc., the
defense, security, and aerospace company is expanding its campus in North Austin. Headquartered in
Virginia, the company expects the 390,000-square-foot (sf) facility to provide more than 1,400 jobs.Page 2 of 7 Diverse Drivers Will Help Austin's Hospitality Market Get Back in the Saddle | March 30, 2021
Besides Tesla and BAE Systems, Inc., Austin has offices for a number of technology companies such as
Dell, Apple, IBM, and Samsung, which contribute at least 6,000 jobs each to the city, according to Austin
Chamber of Commerce, although their campuses are on the outskirts of the city. Facebook leases
117,000 sf at an office building directly across the river, which could also be a demand driver.
In addition to the well-known giants, we also saw projects from a variety of industries making their
presence to Austin. Examples include the electric off-road automotive manufacturer Volcon, online
mortgage start-up Tomo Networks, and the virus testing lab Curative.
For the past few years, Austin has been an ideal choice for corporate expansions and relocation because
of its entrepreneurial ecosystems, tax advantages, booming technology scene, and innovation.
According to the Austin Chamber of Commerce, in 2020, a record-breaking 21,864 jobs were announced
following business relocations and expansions.
Leisure Demand
Because of Austin's reputation built on low cost of living, laid-back lifestyle, and warm weather, multiple
generators provide consistent leisure demand throughout the year. For example, the most popular
annual events include the University of Texas at Austin football games, Formula 1 races at Circuit of The
Americas, Austin Pride Festival, Austin City Limits Music Festival, and the South by Southwest (SXSW)
Music Festival. However, all of those large events were cancelled because of the spread of the
coronavirus.
Among those shelved events, two large music festivals have the greatest impact on the local hospitality
industry. Nicknamed the Live Music Capital of the World, Austin has attracted more than 867,000 music
fans around the world, per the Austin Business Journal, by hosting the weeks-long SXSW Music Festival
each March and Austin City Limits Music Festival each October. The economic effect of these massive
music festivals is huge for local hospitality. During 2019's week and a half long SXSW Conference &
Festivals, visitors booked 51,500 room nights in local hotels and reportedly generated about $356 million
for the local economy, according to SXSW's economic impact study and a report it commissioned.
However, the cancellation of the music festivals and other large conventions and events posed a
devastating effect on Austin’s local hotel industry in 2020.
We expect a much-needed boom for the local economy and hospitality from leisure travel in Q3 2021.
The Austin City Limits Music Festival is set to return again for two weekends in October this year. Tickets
aren't available for purchase yet. However, there are tickets available on the resale market; according to
TicketNetwork, the event may pose requirements such as social distancing, personal protective gear,
and possibly a negative coronavirus test taken within 72 hours of the event. While the SXSW Music
Festival happened virtually from March 16 to March 20, the price to attend was much less expensive,
with online passes costing only $249 to $399, compared with the $1,600 all-access platinum badges in
2020. Although the event’s economic impact on local hospitality will be absent again in 2021, at the
more affordable price for online access, “I think that will help us expand our market both geographicallyPage 3 of 7 Diverse Drivers Will Help Austin's Hospitality Market Get Back in the Saddle | March 30, 2021
and in terms of getting in younger creatives who maybe can’t absorb the current cost of a badge,” Hugh
Forrest, chief programming officer at SXSW, told Austin Inno.
CMBS Exposure
As a result of the pandemic, among the roughly $828 million in commercial mortgage-backed securities
(CMBS) exposed to Austin hotels, about 64.0% is in special servicing and 23.4% is delinquent, exceeding
the nationwide metrics of 24.8% and 19.0%, respectively, as of February 2021. Exhibit 1 displays the 10
largest loans in special servicing ranked by balance. In the sections below, we take a closer look at the
top two loans, Fairmont Austin and Hyatt Regency Austin, along with Holiday Inn Austin, a loan that
passed its October 2020 maturity. We also highlight the Hilton Garden Inn Austin Northwest, a loan that
saw the hotel's value plummet, and the Westin Hotel at the Domain loan, which returned to the master
servicer in January.
Exhibit 1 Largest Specially Serviced Loans by Current Balance
DBRS Loan Name Deal ID Balance ($) Delinquent Specially Forbearance
Morni Description Serviced
ngsta
r
Rated
No Fairmont Austin AFHT 2019-FAIR 300,000,000 Current Yes No
Yes Hyatt Regency Austin MSBAM 2017-C33, 103,000,000 Delinquent Yes Yes
MSC 2017-H1
Yes Westin Hotel at the Domain BACM 2015-UBS7 63,308,838 Current Yes Yes
No Hotel Indigo & Austin BMARK 2018-B2 44,092,507 Delinquent Yes No
Yes Hilton Garden Inn Austin WFCM 2014-LC18 17,718,746 Delinquent Yes n/a
Northwest
No Residence Inn Austin COMM 2016-DC2 16,014,087 Delinquent Yes n/a
Yes Holiday Inn Austin CSAIL 2016-C5 13,041,596 Delinquent Yes No
Yes Wyndham Garden Austin COMM 2014-UBS6 11,909,817 Delinquent Yes Yes
Yes Homewood Suites Austin WFCM 2015-LC22 10,418,272 Delinquent Yes n/a
Yes Hampton Inn Austin WFRBS 2014-LC14 10,272,602 Delinquent Yes No
Source: DBRS Morningstar.
Fairmont Austin (specially serviced and current)
Built in 2018 with 1,048 rooms including 60 suites, Fairmont Austin is the largest hotel in the Austin
metropolitan statistical area. Located across the street from the Austin Convention Center, the luxury
hotel generated 70% of its 2019 revenue from group and convention business. The property, with about
140,000 sf of meeting and convention space, was forced to close from March to May 2020 as
conventions were cancelled and travel demand plummeted. The $300.0 million loan in the single-
asset/single-borrower AFHT 2019-FAIR deal transferred to special servicing in May 2020, but the hotel
implemented cost-saving strategies and the loan has remained current. Negotiations for a forbearance
never bore fruit, and the hotel reopened in May 2020 paired with a group of health and safety experts to
implement high standards of hygiene and cleanliness. The hotel's state-of-the-art amenities and its
location across from the Austin Convention Center are distinct features of the hotel that should lure
travelers.Page 4 of 7 Diverse Drivers Will Help Austin's Hospitality Market Get Back in the Saddle | March 30, 2021
Hyatt Regency Austin (delinquent and specially serviced)
Located by the side of the Colorado River and only a few miles away from Austin's downtown
attractions, the Hyatt Regency Austin is the eighth-largest hotel in the city. With the $103.0 million in
debt split between MSC 2017-H1 and MSBAM 2017-C33, it's the second-largest specially serviced hotel
loan in Austin. The loan was transferred to special servicing in August 2020 for imminent default
because the borrower indicated that the property couldn’t afford its operations. The borrower reached
out in March 2020 for relief. The special servicer approved a waiver of the Q1 2020 cash management
triggers and furniture, fixtures, and equipment reserve deposits through YE2020. Although the loan
remains delinquent, the hotel appeals to a diverse mix of demand drivers. Leisure visitors are drawn to
the city's music festivals and downtown area, while commercial demand comes from the city’s
technology presence and nearby city hall and convention center, which should speed recovery once
travel returns to normal. On March 17, 2021, Host Hotels & Resorts, Inc. (HST) announced that it
acquired Hyatt Regency Austin for roughly $161.0 million in cash, $3.6 million less than the reappraised
value of $164.6 million in November 2020. In the press release, the president and CEO of HST said that
he believed the Hyatt Regency Austin will benefit from a rebound of leisure and business travel demand.
Holiday Inn Austin (nonperforming, matured, and specially serviced)
The $13.0 million Holiday Inn Austin loan in CSAIL 2016-C5 transferred to special servicing in April 2020
ahead of its October 2020 maturity date. The 189-room, three-star hotel about 10 miles northeast of
downtown Austin saw occupancy plunge because of travel restrictions and cancellations of local events.
The property was reappraised in September 2020 for $16.5 million, about 23% lower than the original
appraised value of $21.4 million, which pushed the loan-to-value ratio to 78.9% from 65.4% at issuance.
Hilton Garden Inn Austin Northwest (delinquent, specially serviced, and value decline)
The $17.7 million loan, backed by a 138-room limited-service hotel about 12 miles from downtown
Austin, is more than 120 days delinquent and transferred to special servicing in May 2020. Even before
the pandemic, the property underperformed, posting a more than 25% decline in 2019's net cash flow
from the issuer’s underwritten figure. This likely contributed to a more than 45% drop in value as a
September 2020 appraisal pegged the property’s value at $16.5 million, down from $30.4 million in 2015.
Westin Hotel at the Domain (current and master serviced)
A forbearance agreement, which allowed for three months of interest-only payments, combined with
strong prepandemic performance, likely led to the $63.1 million loan’s January return to master
servicing. Backed by a 341-room full-service hotel, the property has consistently outperformed its
competitive set and benefits from a strong hotel brand. For YE2019, the property generated net cash
flow growth of more than 25% from the issuer’s underwritten figure. New supply is a major concern,
with three hotels either recently completed or under construction in the market.Page 5 of 7 Diverse Drivers Will Help Austin's Hospitality Market Get Back in the Saddle | March 30, 2021
Prognosis for Recovery
Despite the pandemic, the supply of hotels continues to increase. According to the New York Times,
Austin is one of the top five cities for hotel openings, mainly driven by relocations of corporate
headquarters and population growth. Hotel inventory increased by 32.6% over the past five years within
the greater market and will increase by 25.3% by 2024, according to CBRE Econometric Advisors (CBRE).
According to the U.S. Bureau of Labor Statistics, Austin ranks near the top of metropolitan areas that
have lost the least amount of jobs during the pandemic. Austin lost 2.7% of jobs between January 2020
and January 2021, which makes it the third-best performing among the 50 largest metropolitan areas,
trailing just Salt Lake City and Jacksonville, Florida. Further, Austin’s leisure and hospitality industry
added jobs in six of the last eight months. Nearly 59% of the 67,300 leisure and hospitality jobs lost in
March and April 2020 have been regained. As long as Austin keeps its current pace of economic
expansion and attracting business relocations, the risk of hotel oversupply is limited.
However, the recovery process needs some patience. In 2020, Austin saw revenue per available room
(RevPAR) drop by 60.9% from 2019, driven by a 43.4% decline in occupancy and a 30.8% decrease in the
average daily rate (ADR). According to CBRE’s forecast, occupancy, ADR, and RevPAR will not return to
their 2019 levels until 2024. Exhibit 2 displays the forecast from CBRE:
Exhibit 2 Austin Hotels Forecast
Year Occupancy (%) % Change ADR ($) % Change RevPAR ($) % Change
2019 71.70 4.30 145 1.90 104 6.20
2020 40.60 -43.40 101 -30.80 41 -60.90
2021 F 49.20 21.30 93 -7.30 46 12.50
2022 F 61.60 25.20 114 21.90 70 52.60
2023 F 67.90 10.20 136 19.20 92 31.40
2024 F 71.60 5.40 156 15.20 112 21.50
2025 F 72.50 1.20 172 10.10 125 11.40
Source: CBRE Hotels Research, Kalibri Labs, Q4 2020.
After a series of severe winter storms swept across the United States in February, Texas experienced
statewide power outages and the resultant shortage of drinking water and food. Amid the storms,
Austin hotels saw demand spikes as visitors and local residents sought out places with heat and running
water. The rise in hotel demand is likely temporary, and DBRS Morningstar expects occupancy to return
to normal as the power and water supply are restored. The power outages would likely not affect the
local hospitality industry in the long run. However, the crisis drew public attention to the state’s lack of
preparedness for harsh weather and to the failure of the power grids, which may spark safety concerns.
Nevertheless, Austin is a resilient market with many strong, diverse sources of room-night demand. We
expect leisure travel in Austin to rebound in Q3 2021 as the roll-out of the vaccination gains steam. It’s
clear that large business and group travel will be slower to recover as big group gatherings will likely not
be encouraged, and the pandemic norms like social distancing will carry on. To attract more leisure and
business travelers, hotels need to invest in medical-grade cleaning procedures and contactless check-in
to ensure safe trips. We believe that once herd immunity has been reached and people feel safe toPage 6 of 7 Diverse Drivers Will Help Austin's Hospitality Market Get Back in the Saddle | March 30, 2021
travel and socialize with appropriate health recommendation, Austin should see recovery more quickly
than many other markets.Page 7 of 7 Diverse Drivers Will Help Austin's Hospitality Market Get Back in the Saddle | March 30, 2021
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