Hotel values will increase 8.8% during 2013, according to the latest Penn State Index of U.S. Hotel Values.
STATE COLLEGE, Pennsylvania—Hotel values are set to increase through at least 2014, led by particularly strong gains in the economy segment, according to the latest Penn State Index of U.S. Hotel Values.
Hotel values are projected to increase 8.8% during 2013, equating to a per-key value of $106,957. During 2014, values are projected to increase 6.9% to a per-key value of $114,334, according to the index.
“Hotels continue to be a preferred investment during uncertain economic times. U.S. gross-domestic-product growth is expected to continue, but not at inspiring levels. Long-term interest rates are anticipated to remain fairly low. Unemployment is expected to continue to hover in the 7% range, keeping consumer spending relatively strong,” said John O’Neill, director of Penn State University’s School of Hospitality Management and creator of the index.
“Occupancy levels will be at or near their historical peak. Average daily rates are expected to register moderate gains. Construction activity is expected to remain moderate, or at least well below historical averages. Commercial and leisure transient hotel room demand is expected to stay pretty strong, whereas group demand is a bit dicey.
“Average U.S. hotels are expected to remain profitable in the near term,” he said.
The economy segment is projected to notch the largest increases during both 2013 and 2014. Per-key values in the segment will increase 14.3% to $27,668 this year and an additional 9.7% to $30,356 next year.
The segment also recorded the largest decrease (-30.5%) when hotel values dropped during 2009.
The remaining segments are projected to post healthy gains in 2013 as well:
- luxury: 9.4%;
- upper upscale: 8.1%;
- upscale: 8.5%;
- upper midscale: 7.5%; and
- midscale: 9.2%
Various factors are contributing to the deceleration of hotel values into 2014, O’Neill said.
“The poor or lack of management of national debt in the U.S. and abroad will become an increasing concern. Defense spending is expected to be tightened. Income taxes are anticipated to increase. Sequestration continues to be a concern in many markets,” he said.
Deceleration is projected for all industry segments. But should investors expect a dip into negative territory any time soon?
“At this stage, it's very difficult to predict a decline in hotel market values with any reasonable degree of statistical confidence. Given the deceleration in growth in many markets, such a turn could occur within a few years, but there is no indicator that we should fear it in the near future,” O’Neill said.