Dearth of luxury hotels in Dallas creates Texas-sized opportunity

DALLAS — When exploring why Dallas continues to lead the U.S. in hotel construction, the reasons are almost as numerous as the 189 deals currently listed in its pipeline.

“Dallas is seeing really strong GDP growth and is expected to continue to see really strong growth over the next three to five years,” said Zach Demuth, global head of hotels research at JLL. “Historically, GDP and hotel demand have a strong correlation.”

Zach Demuth

“For the last three or four years, it’s been a hot market because it remained open,” added Colin Sherman, CoStar's director of hospitality market analytics, Texas & Tennessee. “When a lot of the U.S. travel was restricted, it remained a very open market, and it was easy to get there. The same elements that made it strong during the pre-COVID years continue now."

The Dallas market, which stretches in all four directions for dozens of miles past the nation’s 9th largest city, has led the U.S. for the second and third quarters of 2023 in hotel construction pipeline deals, according to Lodging Econometrics. Through the third quarter, Dallas has 189 deals and 21,840 rooms in its pipeline. Those projects break down to 25 projects and 3,178 rooms under construction, 80 projects and 9,021 rooms starting in the next year and 84 projects and 9,641 rooms in the early planning stages.

According to CoStar data, Sherman said that in the near term, approximately 6,500 hotel rooms are expected to be delivered in the Dallas area in the next 36 months.

Colin Sherman

Brian Nordahl, executive vice president for CBRE Hotels, said developers like Dallas because of its economically friendly conditions for taking risks.

Sam Tabani, founder and managing director of Dallas-based brokerage Tabani Real Estate, said Austin is typically the preferred hospitality market in Texas. However, the price and scarcity of land there have others looking for alternatives and many investors “have come looking in Dallas.”

“I’ve been in Dallas for the last 25 years, and we used to buy land for about $4-5 a square foot. That’s turned into the mid-$20s,” Tabani said.

Demuth said another factor setting the Dallas market apart is the migration shift during COVID. While most markets have seen that shift slow down, the opposite is happening in Dallas-Fort Worth.

“If anything, it’s actually accelerating further. And you’re seeing particularly a population migration of the upper upscale, luxury side of earners.

‘Luxury tier’

That influx of top earners is important for the market because Dallas has one of the lowest percentages of luxury hotels relative to all hotels for top U.S. markets.

According to CoStar data, Dallas ranks third lowest across the top 25 U.S. hotel markets, with only 3.3% of its hotel supply in the luxury segment. (For comparison, Las Vegas is the top market at 28.1% and the average across the top 25 is 10.6%.)

Hotel Swexan

That creates a lot of opportunity for development in the upper upscale and luxury segments, and developers are filling that need.

Big projects already announced in the luxury or upper upscale space include a new Four Seasons Turtle Creek which is being developed by Boston-based Carpenter & Co.;  a J.W. Marriott Dallas Arts District being developed by Plano, Texas-based Sam Moon Group; a Hotel Swexan being developed by Dallas-based Harwood International; the already complete Omni PGA Frisco Resort in the suburb of Frisco, which was a public-private partnership; and, in Fort Worth, the Bowie House, Auberge Resorts Collection developed by Jo Ellard and Fort Worth-based Bowie Place Properties; as well as the Crescent Fort Worth hotels, developed by Fort Worth-based Crescent Real Estate. 

“These are all well-known brands that have footprints in multiple other cities,” Demuth said. “The fact that suddenly they’re all coming to Dallas is a great indication that we are seeing this strong growth in demand for upper upscale and luxury.”

The string of high-profile projects also marks an important time in the market’s hospitality development history.

Brian Nordahl

“We’ve never really had a luxury tier here in Dallas… Now we have the entrance of some great high-end lifestyle hotels,” Nordahl said. “There is this band of luxury that just didn’t exist here. Developers have taken the opportunity to recognize from significant relocations on the corporate side, but also very wealthy individuals relocating here from California and other places that will patronize these properties, both for the food and beverage and everything else.”

Nordahl said the development of The Knox, Auberge Resorts Collection in Dallas, which is a joint venture of MSD Partners, Trammell Crow Company, The Retail Connection and Highland Park Village Associates, could also be an important milestone for the city.

“Auberge is going to set the standard for ADR in Dallas, and it will certainly test the limits of that,” he said. “The rub on Dallas is we’ve never been able to push ADR to the levels of other major cities in the United States, and I think this luxury stuff is going to make that happen."

Lower development costs

Demuth said another strength of the Dallas market is that it’s relatively inexpensive to build a hotel there compared to the rest of the country.

Dallas is one of the few primary markets in the U.S. where it’s still less expensive to develop a hotel than it is to acquire a new one, which isn’t the case anywhere else.

Zach Demuth

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“Dallas is one of the few primary markets in the U.S. where it’s still less expensive to develop a hotel than it is to acquire a new one, which isn’t the case anywhere else,” he said. 

Demuth compared Dallas to the New York City market, where it’s 30% less expensive to acquire a hotel than build a new one, whereas Dallas is even.

“When you think about it from an acquisition or investment perspective, if you can develop a new hotel for roughly the same cost that you could acquire one, why would you not develop [a new one], particularly given these migration patterns,” he said.

That has created many opportunities for growth in the select-service segment, particularly north on the Dallas North Tollway, which connects the city to some of its most prosperous suburbs.

“That’s the new nexus of all this new development, and hotels will follow,” Nordahl said.

Demuth said the select-service growth speaks to the growth in business, particularly construction, financial services and medical.

Sam Tabini

“Our team continues to be increasingly involved in the select-service segments… and that grows in the non-urban core,” Demuth said. “Those are typically more inexpensive hotels to build, and there’s so much demand.”

Tabani said the region benefits from diversification from many different types of employers (unlike its counterpart in Houston, which has an economy more tied to oil and gas.)

“Dallas has properly planned this master diversification that we see from different sectors, and it’s become a hub,” he said.

DFW’s submarket growth

Another factor that makes the Dallas market unique is its expansive size (think of an area the size of New England in North Texas).

“There is a lot of geographic diversity in the Dallas ma­rket,” Sherman said. “There are a lot of submarkets that do provide an urban living environment.”

Sherman noted that while the Dallas Central Business District submarket leads the area in 12-month ADR, ending in October ($188.57) and RevPAR ($121.14), there are a host of submarkets doing impressive numbers as well, such as:

• Bedford/Grapevine ($157.07 ADR/$113.83 RevPAR)
• Fort Worth CDB/I-820 West ($152.25 ADR/$101.10 RevPAR)
• West Plano/Frisco ($135.97 ADR/$89.70 RevPAR)
• Irving North Area ($128.17 ADR/$88.72 RevPAR)

Demuth said the Frisco and West Plano submarkets are interesting because they have historically seen great demand in the select-service segments and are now getting many more projects in the luxury and full-service segments.

Tabani said the interest in the Frisco/Plano area is driving demand that can seem irrational. He said if investors want to sell property in Frisco, “nobody wants to take anything less than replacement value."

“We’re involved in two deals in Frisco right now, and we’re trading at $130,000-150,000 a key,” Tabani said. “The numbers don’t make sense right now because things have slowed down.”

This begs the question of how many of these 189 deals in the pipeline will actually happen. Tabani said interest rates will be the key factor.

“Because if interest rates don’t start going down in the next 12 to 18 months, those people will obviously not be able to build promptly. In some markets, if the cost is too high to build, the ADR may not support it,” he said.

Dallas is getting its first JW Marriott hotel.

Opportunities in Downtown Dallas

That’s not to say there aren’t impressive development in Dallas’ urban core. Nordahl noted DFW-based NewcrestImage purchasing the Magnolia in Dallas and announcing hundreds of millions in renovations to the historic hotel.

“They are probably the smartest investors in our business right now,” Nordahl said. “Making that kind of commitment to downtown Dallas. It’s extraordinary. And it shows where there was a need… and will test the market, regarding where ADR can go.”

Dallas voters last year approved extensive renovations to the city’s convention center, which means the city won’t have one between 2024-28. Nordahl said it will create hotel opportunities, especially the newer luxury/upper upscale projects.

“It’s going to be an interesting time for the hotel business because Austin’s convention center is being rebuilt during that same time,” Nordahl said. “Many of these [luxury] hotels will benefit because groups will still want to come to Dallas.”