REPORT FROM THE U.S.—There’s still a big hill to climb, but hotel values are slowly making their way back to their previous summit.
According to Green Street Advisors’ Commercial Property Price Index, hotel values grew by 0.3% on a month-over-month basis to a reading of 78.40. That followed a 3.2% gain in August. The index hasn’t registered a month-over-month decline in hotel values since August 2011.
But there remains a lot of ground to make up. The index hit its peak in April 2007 when it reached 100.
Richard Sprecher, VP of business development at Aimbridge Hospitality, which has approximately 87 hotels in its portfolio, has noticed the increase in values. He said two or three years ago, hotels could be bought at approximately 50% of replacement cost. Today, he is seeing hotels being acquired at approximately 75% of replacement cost.
“Everybody feels a little better,” he said. “Consumer confidence is up. We see business turning up.”
Sprecher said hotel assets located in downtown markets and branded under flags from such chains as Hilton Worldwide, Marriott International and Starwood Hotels & Resorts Worldwide, are apt to see the biggest value hikes.
“I think the trend will continue,” he said.
HVS, which recently released its “2012 United States Hotel Valuation Index” report, is predicting one of the longest stretches (2010-2016) of hotel value increases in recent memory. Steve Rushmore Jr., who is the co-author of the report, pointed to continued recovery in the hotel sector and a lack of new supply as being two reasons why.
The U.S. hotel industry, for one, reported increases during September in the three key performance metrics of occupancy, average daily rate and revenue per available room, according to STR, parent company of HotelNewsNow.com. Occupancy grew by 0.4% to 63.4%, ADR increased by 3.4% to $107.29 and RevPAR was up 3.8% to $67.97.
Meantime, projected supply continues to shrink. There were 289,145 rooms in the total active pipeline as of September, a decrease of 8.3% year over year.
Transactions heating up
The increase in values also is represented by recent deal pricing. In its report, HVS found that price per key during 2011 increased by 16% from $185,000 to $214,000.
Further, the number of deals valued at greater than $10 million increased by 40%, following the 80% increase in such deals since 2010.
Jones Lang LaSalle reported global investor activity was stable during the third quarter, with $96 billion transacted during the quarter, compared to $106 billion in volume during the second quarter. Strong, established markets led the buying activity during the third quarter, JLL reported.
Rushmore said via email deals are likely to continue flowing.
“It is quite likely that we will see sales transaction activity return to those levels, especially since financing is increasingly available and the CMBS is starting to pick up,” he said.
Slow climb back
As is evidenced by the price-per-key data, hotel values still are facing some headwinds. Jack Corgel, the Robert C. Baker Professor of Real Estate at Cornell University’s School of Hotel Administration, said the value recovery has been uneven.
“I would characterize hotel values as increasing, albeit slowly,” Corgel said. “In certain key markets, recovery has been more rapid.”
The focus remains on high-profile markets, he said. Markets such as Los Angeles, Miami, Washington, D.C., Boston and Seattle, Washington, are within 25% of prior peak. Other markets remain 50% of prior peak.
Aimbridge’s Sprecher agreed that downtown trophy assets will see values rise most quickly. But he remains optimistic that the rising tide of value will lift all classes of hotels.
“Things will get better,” he said. “We’re absolutely very positive.”
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