HVS International, a global hospitality consulting and hotel appraisal firm, recently published the 2002 Investment Overview of the U.S. Lodging Industry. This comprehensive research document focuses on the various forces impacting the economic viability of the hotel industry and presents informative data that establishes criteria for hotel investors to consider before making their acquisition decisions.

  • Historical Occupancy and Average Rate Trends, and Projections Based on Supply and Demand Trends
  • Profile of Hotel Buyer and Investors
  • Trends in Hotel Sales Transactions from 1980 to 2001
  • Hotel Valuation Index (HVI) Developed by HVS International
  • Future Hotel Industry Trends

Because hotels generate revenue based on occupancy and average rate, the supply and demand relationship is an important factor in analyzing profits and value in hotels. The Investment Overview presents historical hotel supply and demand information from the 1920s through the present, with particular focus on the period from 1970 through 2001, and projections through 2005.

"History has shown that during economic downturns, hotel values generally do not fall in proportion to the properties' declining incomes," states Stephen Rushmore, founder and president of HVS International.

"The decline in hotel operating performance that the market is currently experiencing is similar to the declines experienced in 1990 and 1991," states Alexandre Sogno. "However, in 1991 the loss of value was driven by the oversupply of hotel rooms, which has a longer-term affect on the market; the current loss of value per room is primarily a result of a loss in demand. Due to these factors, a faster recovery of value can be expected in the United States."

"The downturn of the economy in 2001 and the events of September 11th have led to the lowest number of hotel sales transactions since the early 1980s. However, these events have not significantly affected average per-room prices, which remained at a level just below the all-time high of $116,000 realized in 1999," adds Tom Dolan.

The profile of the typical hotel buyer and investor has changed over time. During the mid 1980s, when tax-driven investments were popular, many hotels were purchased by passive investors who hired management companies to operate their properties. These owners had little to do with day-to-day operations, which occasionally led to poor management and, consequently, financial losses. In the early 1990s, the primary market participants were owner/operators who had the ability to turn around under-performing properties with their acquisition funds (usually from a joint venture partner) and management expertise. Hotel buying trends in recent years have consisted of real estate investment trusts (REITs) and C-Corps, which have actively acquired hotels by using funds from public equity stock offerings.

The lending environment has also changed. Many lenders have stopped financing new hotels due to the high rate of supply growth in the late 1990s, along with the slowing economy and the events of September 11th. Today, traditional or institutional lenders are primarily lending on safer investments, such as high-quality, full-service properties with owners that have proven track records rather than on the over-built limited-service properties. However, credit companies are usually willing to look at a riskier class of real estate, and are getting interest rates that are higher than those generally accepted by institutional lenders. Investment banks, the third major class of hotel lenders, were making commercial, mortgage-backed securitized (CMBS) loans until September 11th; however, many of these banks have now decided to wait out the recession.

Historically, hotel average room rates have generally outpaced the Consumer Price Index (CPI) when occupancies are strong or moving upward. However, in 2001, nationwide average room rates actually declined according to Smith Travel Research. In addition, occupancy was also at its lowest level since the 1970s, which led to a substantial decrease in RevPAR. When occupancies are low or declining, room rate growth tends to lag behind the CPI; and in some cases, average rates may drop, as seen in 2001. At other times they were more than 100% higher than the gains in the CPI as seen in 1978 and 1996. Projections for the future indicate a moderate average rate growth with occupancies increasing steadily due to limited new supply.

HVS International constantly monitors hotel markets in order to collect information on hotels sales and trends. HVS' comprehensive database, the Lodging Databank, contains information on hotel transactions that occurred in the United States from 1990 to the first quarter of 2002. The lodging Databank represents more than 90% of all the hotel sales that took place in this time period, and it demonstrates that the number of transaction peaked in 1996 at 835. This same period was characterized by extremely strong growth in the average sales price per room. The Investment Overview also breaks down the hotel transaction information by quarter from 1997 to 2001 in order to further display how the volatility of the market and the economy affected hotel sales.

A more meaningful indicator of trends in hotel value is the Hotel Valuation Index (HVI), developed by HVS International. This index tracks changes in hotel values in 46 major markets and the nation as a whole. It is developed through an income approach, using market area data provided by Smith Travel Research and operational and capitalization rate information from HVS International, and is indexed to the 1987 U.S.A. value (1.0000). Stephen Rushmore's latest HVI projections, which were updated in early 2002, are also included in the latest Investment Overview.

Since 1980, HVS International, the leading global hospitality consulting organization, has provided financial and valuation consulting services for more than 10,000 hotels in all 50 states and more than 60 foreign countries. Our professional staff of more than 150 industry specialists offers a wide range of services, including market feasibility studies, valuations, strategic analyses, development planning, and litigation support. Through our divisions and alliances, HVS supplies additional hotel consulting expertise. HVS databases contain comprehensive information on more than 30,000 hotel transactions, operating agreements, financial statements, and compensation information.

For more information about the 2002 Investment Overview of the U.S. Lodging Industry, contact Tom Dolan (ext. 218) or Alexandre Sogno (ext. 217) at 516-248-8828, or e-mail Tom or Alexandre at [email protected] or Alexandre Sogno [email protected], respectively. To purchase a copy of the 2002 Investment Overview of the U.S. Lodging Industry, contact Joan Raffetto at 516-248-8828, ext. 231, or email [email protected]. The fee is $250 for an electronic copy or $350 for a bound hard copy

Stephen Rushmore
President
516-248-8828, ext. 278
HVS