Evaluating the '08 Hotel Investment Market

The ongoing dislocation in the US credit markets continues to generate fragile investor confidence and economic uncertainty. Until now, the current slowdown in the US economy has been driven by specific sectors, including residential, banking/financial services, and most recently, retail. Some believe the recent, highly publicized, takeover of Bear Stearns was an inflection point and that the worst is now behind us; others are of the opinion that the US and select foreign economies impacted by slowdowns have yet to bottom out. Either way, the fundamentals of the US lodging industry continue to exhibit positive indicators and the outlook is for continued, albeit slower, growth in the sector. During the next several years, the national hotel occupancy level is anticipated to remain relatively flat at roughly 63%. Average room rates are expected to continue to grow above the nation’s underlying inflation rate. This resultant combination suggests real RevPar increases.

Many US hotel owners believe that during the past several months hotel values have moved sideways. However investors, looking to acquire lodging assets in today’s market environment, hold that values have declined as much as 30%. With a sluggish sales market and profits still increasing, US hotel owners are under little, if any, pressure to sell. In theory, US hotel capitalization rates have risen during the recent past, but this increase has been somewhat neutralized by a simultaneous growth in hotel profits. I have not seen empirical evidence that supports the notion of erosion in US hotel asset values.

The CB Richard Ellis Valuation & Advisory Services Hospitality & Gaming Group continuously monitors the major US hotel sale transaction market. Our quarterly Major US Hotel Sales survey reports single asset sale transactions above $10 million each that are not part of a portfolio allocation.

Interesting observations from our Q1 2008 survey when compared to Q1 2007 include: