Texas Hospitality: COVID-19 Impacts to Date and the Future of Property Taxes

By: Alex Reedy – Senior Manager – Real Estate

It’s no surprise that the hospitality industry was incredibly impacted by COVID-19. According to data from STR*, at the onset of the pandemic, between February and April of 2020, hotels lost 42.3% of their jobs, business travel virtually disappeared overnight, and leisure travel underwent a vast reduction in occupancies due to shutdowns. In Texas specifically, room revenues dropped over 40%; a nearly $5 billion loss from 2019. Occupancy plummeted 30% and revenue per available room (REVPAR) dropped from $68 to $40.

As a result of the sharp decline in overall metrics and great uncertainty as to how long this may last, investors mostly stayed away from this asset class, even in Texas where restrictions were more relaxed than other parts of the country. In 2020, hotel transaction volume in the U.S. declined almost 52% compared to 2019, and delinquencies and permanent closures were on the rise. The hospitality industry was ravaged, and experts did not anticipate a return to pre-pandemic levels until early 2024 due to the decrease in demand.

From a property tax perspective, we saw many county assessors across Texas provide relief in the form of significantly reduced notice values. It was common to see a year-over-year reduction in the assessment between 20-30%. That said, the general understanding was that this was likely a one-time “COVID discount,” since by January 2021, when Texas resets for the new tax year, vaccine rollouts had begun, and the metrics had started to improve as restrictions and lockdowns were being lifted.

Flash forward to tax year 2022 and the recovery in Texas is quite strong. 2021 room revenues are up 60% from the previous year ($7.3B in 2020 and $11.6B in 2021); just 5% lower than 2019. In fact, Q4 2021 revenues are 8.3% higher than Q4 2019.

Even though occupancy increased to 57.8%, up from 46.3% in 2020, it’s still lower than pre-pandemic levels in the 65% range. So how are room revenues nearing pre-pandemic levels already when occupancy is still lagging?

The answer to this is average daily rates (ADR) increasing nearly 14% in 2021. Hotel operators opted to increase ADR instead of waiting for occupancy to bounce back naturally over time. Typically, this is a more symbiotic relationship: as occupancy and demand increase so does the rate you can charge for a room. Conversely, if the occupancy and demand numbers falter, the operator will likely reduce ADR in hopes to attract more travelers. So, while the topline revenue numbers look great on the surface, REVPAR is still about 15% lower than 2019.

Recovery appears to be significantly uneven, market to market.

Those recovering more quickly tend to be those in more leisure/tourist-oriented cities (Austin and San Antonio). While the cities that depend on a significant amount of business travel/corporate transient demand have yet to catch up (Dallas and Houston). More businesses are electing to embrace working from home, reducing the amount of business travel necessary overall. It remains to be seen whether corporate transient demand will ever reach pre-pandemic levels; regardless, the early indication is that the hospitality segment has been much slower to recover than other forms of real estate.

What does this mean for Texas hospitality property taxes moving forward?

County assessors in Texas are certainly aware of this recovery and will likely attempt to regain a good portion of the lost tax base from the “COVID discount.” Although recovery is very much still in progress, we expect assessors to be aggressive on their initial values for hospitality properties in the coming weeks. The topline revenues for the asset class appear healthy, but there are underlying conditions that haven’t led us back to pre-pandemic profitability. Ultimately, every market is different, and not all classes of hotel are recovering in the same fashion.

As notices of value are disseminated in the coming weeks throughout Texas, it is important have a plan in place that ensures that your hospitality property is being assessed fairly and taxed appropriately as a result. Invoke Tax Partners has a distinguished group of property tax consultants specializing in hospitality properties for Texas and all across the nation. Our mission is to ensure maximum property tax savings for hospitality assets.

For more information regarding hospitality property values, property taxes, and how Invoke Tax Partners may be a resource for your Texas real estate portfolio, please contact Alex Reedy.

*Data points and other quantitative information from this report have been compiled from STR (www.str.com).