Hotels as an investment class are being viewed more favorably by institutional investors as the economy improves. Related to its increasing importance as an asset class, the number of hotel assets in the NPI property index has increased from 6 to 70 over the period 1982 to 2010. This represents only 1.9% of the total value in the index however, making it substantially under weighted compared to other asset classes.
Hotel values are more volatile than many other property types because of the short-term nature of the leases (rooms). Occupancies and average daily rates can change quickly and are closely tied to gross domestic product and the overall economy. Although there has been a rebound off the lows of the recession there are obstacles and a headwind.
Since September of 2009 the number of distressed commercial properties has risen 48% and the number of commercial foreclosures has increased 33% according to CoStar. Of the $62 billion in delinquent commercial mortgage backed securities approximately $9.4 billion are hotel securities according to Realpoint, a ratings firm.
Does it feel like we're only fifteen percent below the 2007 peak? The Green Street commercial property index (CPPI) shows values are up 35 percent since the bottom in May 2009 and are now fifteen to twenty percent below the last peak in pricing. However, this index is weighted toward high end or trophy properties that are part of forty seven real estate investment trusts. In contrast, the Moody index shows the market fell 42.1 percent from the 2007 peak and has since recovered only 5.5 percent. The Moody index uses repeat sales of commercial properties that have sold for more than two and a half million dollars. If you're a typical hotel owner I'm sure you feel like you're part of the Moody index.
Consumer confidence is still not in a good place. A large percentage of residential mortgages are under water and unemployment is still at a high rate. There is concern that higher gasoline prices are going to dampen what confidence remains as unrest in the Middle East drives oil prices higher. High gasoline prices keep consumers at home and hotel occupancies low.
At the 23rd annual Hunter Hotel Investment Conference recently they expressed slight concerns that not everything is rosy. Jan Freitag, VP of global business development for STR said: Given the strong demand growth (8% room demand growth in 2010), you would expect some life on the rate side but it hasn't happened yet. Occupancy remains below 60% (58.7% in 2010) and developers consider 60% to be the magic number. Revenue per available room is down 13.8% from 2007. Average daily rate increases are lower than inflation, and every recession results in steeper rate discounts.
Going-in capitalization rates for first-tier (newer construction in prime to good) locations show a range of 6-12% with an average of 9.1% in the South Region estimates Real Estate Research Corporation. Second-tier properties (aging, former first-tier properties, in good to average locations) show a range of cap rates from 7-13% in the South Region with an average going-in cap rate of 9.8%. Third-tier hotels in the South Region (older properties with functional inadequacies and/or marginal locations) show a range of going-in capitalization rates of 7-14% with an average of 10.5%.
During 2010 real estate financing improved during the year and capital markets recovered. Fundamentals are generally stabilizing. Property values are stabilizing, and lender confidence improved during 2010. Credit spreads declined throughout the year, capital sources increased, and historically low interest rates continue.
Looking forward to the rest of 2011, we still have a high unemployment rate, home prices are still down from the peak, public debt levels are high and there is a risk of higher interest rates. On the brighter side GDP growth continues, unemployment is trending down, and for now, interest rates remain low.
Hotel values have fallen and they can't get up! Have the assessors lowered your values to something reasonable? The mass appraisal system they use can only be right some of the time. During this market every year is a good year to appeal your real estate assessment.
Hotel values are more volatile than many other property types because of the short-term nature of the leases (rooms). Occupancies and average daily rates can change quickly and are closely tied to gross domestic product and the overall economy. Although there has been a rebound off the lows of the recession there are obstacles and a headwind.
Since September of 2009 the number of distressed commercial properties has risen 48% and the number of commercial foreclosures has increased 33% according to CoStar. Of the $62 billion in delinquent commercial mortgage backed securities approximately $9.4 billion are hotel securities according to Realpoint, a ratings firm.
Does it feel like we're only fifteen percent below the 2007 peak? The Green Street commercial property index (CPPI) shows values are up 35 percent since the bottom in May 2009 and are now fifteen to twenty percent below the last peak in pricing. However, this index is weighted toward high end or trophy properties that are part of forty seven real estate investment trusts. In contrast, the Moody index shows the market fell 42.1 percent from the 2007 peak and has since recovered only 5.5 percent. The Moody index uses repeat sales of commercial properties that have sold for more than two and a half million dollars. If you're a typical hotel owner I'm sure you feel like you're part of the Moody index.
Consumer confidence is still not in a good place. A large percentage of residential mortgages are under water and unemployment is still at a high rate. There is concern that higher gasoline prices are going to dampen what confidence remains as unrest in the Middle East drives oil prices higher. High gasoline prices keep consumers at home and hotel occupancies low.
At the 23rd annual Hunter Hotel Investment Conference recently they expressed slight concerns that not everything is rosy. Jan Freitag, VP of global business development for STR said: Given the strong demand growth (8% room demand growth in 2010), you would expect some life on the rate side but it hasn't happened yet. Occupancy remains below 60% (58.7% in 2010) and developers consider 60% to be the magic number. Revenue per available room is down 13.8% from 2007. Average daily rate increases are lower than inflation, and every recession results in steeper rate discounts.
Going-in capitalization rates for first-tier (newer construction in prime to good) locations show a range of 6-12% with an average of 9.1% in the South Region estimates Real Estate Research Corporation. Second-tier properties (aging, former first-tier properties, in good to average locations) show a range of cap rates from 7-13% in the South Region with an average going-in cap rate of 9.8%. Third-tier hotels in the South Region (older properties with functional inadequacies and/or marginal locations) show a range of going-in capitalization rates of 7-14% with an average of 10.5%.
During 2010 real estate financing improved during the year and capital markets recovered. Fundamentals are generally stabilizing. Property values are stabilizing, and lender confidence improved during 2010. Credit spreads declined throughout the year, capital sources increased, and historically low interest rates continue.
Looking forward to the rest of 2011, we still have a high unemployment rate, home prices are still down from the peak, public debt levels are high and there is a risk of higher interest rates. On the brighter side GDP growth continues, unemployment is trending down, and for now, interest rates remain low.
Hotel values have fallen and they can't get up! Have the assessors lowered your values to something reasonable? The mass appraisal system they use can only be right some of the time. During this market every year is a good year to appeal your real estate assessment.
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