It was good to see in one of the hotel trade papers last week that even people who do market studies and appraisals agree with my past comments that these studies are made up of a lot of guesses. In a November column published in “Lodging Hospitality,” HVS’ Steve Rushmore said the following:
• It is “unrealistic to look for a high level of accuracy in making these long term hotel projections.”
• “Looking into the future is always subject to unforeseen events that can render your projections incorrect.”
• “Users of hotel feasibility studies need to understand the accuracy of the findings start to deteriorate the day the study is issued.”
This can also be directly applied to all appraisals.
The point I have made several times over the past year or more is that appraisals—and now we see, market studies—are acknowledged by the authors of the studies to be nothing more than a bunch of guesses about which they really have no idea. Anyone who thinks they are accurate estimates of value or the future has “unrealistic expectations”.
These appraisals and studies are just one person’s guess of what the future holds—and often that person is young and has never built or owned a hotel. The people preparing these are not economists. They are not involved in the capital markets. They have no insight into Washington. In general they are nice people who just assemble data and make uninformed guesses about the future of the economy and the capital markets.
Hire those in the know
There is vast uncertainty because nobody today has any real way to know what is going to be the outcome of the European banking and currency crisis, the future of construction lending in the U.S., the level of unemployment, or even who will be the president come January 2013. If there is one overriding thing we hear from almost everyone, it is there is uncertainty due to the total lack of any leadership from the White House and all of the gridlock in Washington. Now the same thing is playing out in Europe. In addition, there are things I will write about another time related to Dodd Frank, tax reform, Foreign Investment in Real Property Tax Act and other more arcane issues that will deeply affect U.S. real estate in the future.
Hotel Assets Ad Will Appear Here
Bottom line: If you need to understand if a project makes sense, retain a senior hotel industry consultant who will not give you some off-the-shelf commodity study, but who will be able to tell you honestly what makes sense or not. There are several: Chuck Tomb, David Berins, Bruce Baltin, Scott Berman, Suzanne Mellen and others. These are all very senior people, who if hired, will tell you the truth and will give you good, solid advice about your project. If you want to know what your hotel is really worth, get a top broker and have him advise you—people like Bob Hunter, Sam Winterbottom, Alan Reay and several others.
A step backward
Then I read an item in another online hotel industry news service the other day by someone at the Buyer Interactive Trade Alliance & Conference who advised that we should all just ignore reality, and that 2015 will be great. What does it matter what people label as cautionary, he asked. He claimed those things are just negative thinking, and you should throw your money at deals now.
While we all hope things will be much better in 2015—and it is possibly a very good time to be investing in 2012—you better understand how to hedge your risks, not lever up, and buy right, which is key to all deals. It is all on the buy.
Whatever magic wonderland that speaker was living in is divorced from reality. It is going to be a very tough haul to get to 2015 and beyond, and you need to very carefully analyze what you are investing in, and do it in a way that is fundamentally underwritten and that assumes anything can happen. That is the reality of the world we live in for the next several years.
Nothing is for sure these days. Well-underwritten investments and well-structured financing should make a solid profit in four to five years. Just don’t count on it all going as you planned.
Joel Ross is principal of Citadel Realty Advisors, successor to Ross Properties, the investment banking and real-estate financing firm he launched in 1981. A pioneer in commercial mortgage-backed securities, Ross, along with Lexington Mortgage and in conjunction with Nomura, effectively reopened Wall Street to the hotel industry. A member of Urban Land Institute, Ross conceived and co-authored with PricewaterhouseCoopers The Hotel Mortgage Performance Report. Ross is also the author of Ross Rant, a commentary on the economy, financial markets and politics that is available through his website, www.citadelrealty.com.
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