By Stephen Rushmore, CRE, MAI, CHA
With the economic downturn in the lodging industry, hotel values during 1990 declined an average of 5% across the country. Areas that ex perienced the greatest declines were Philadelphia, Norfolk Boston, Riverside, Washington DC, Anaheim, New York, Las Vegas, I-os Angeles, and San Diego. On the positive side, hotels in Denver, Houston, Tampa, Atlanta, Minneapolis, Dallas, New Orleans, and Fort lauderdale experienced increases in value during this period.
These were the latest findings revealed by the Hotel Valuation Index (HVI), a sophisticated valuation benchmark developed by HVS (Hospitality Valuation Services, Inc.), in association with Smith Travel Re search. The HVl shows an indexed market value of a typical hotel situated in 24 different regions of the country. This index has been calculated since 1986 to reflect value trends over a period of time.
The HVI table shows the cities ranked according to their 1990 HVI. Hotel values are the highest in Honolulu, New York, San Francisco, and Orlando, while similar properties in Norfolk, Dallas, Denver, and Minneapolis generally connnand the lowest prices.
Although Houston is near the bettom of the list for value per room, it ranks first in value recovery by gaining 210% between 1986 and 1990. Hotels in Orlando, New Orleans, Honolulu, Tampa and Miami also experienced impressive gains during this period. The biggest losers were hotels located in Norfolk which lost 45% of their value during this period followed by properties in Philadel phia and Boston. The average hotel in the United States experienced a 7% positive value change between 1986 and 1990.
Hotels in Denver and Houston had gains of over 40% in 1990, while the slowdown in the Northeast adverse ly impacted the values of Philadelphia, Norfolk and Boston properties by 19%, 18%, and 15%, respectively. The upward trend in New York City hotel values was ended in 1989 when room revenue increases failed to keep up with inflation and fell 13% during 1990.
Hotels in cities that lost value were generally impacted by declining occupancies and room rates that did not keep up with inflation, while those areas that benefited fromhigher occupancies and room rates showed the greatest improvement in hotel values.
Hotel values still remain at depressed levels in many areas of the country For example, the 1990 value of a hotel in San Diego would be over three times greater than a similar property situated in Dallas. If beth of these hotels were developed at com parable costs, it is evident that the Dallas property is probably experiencing financial difficulties, even though Dallas-area hotel values are currently rebounding.
In 1990 there were 19 market areas that posted an HVI abeve the U.S. average, and five that were below. This compares to 1986 when 18 markets outpaced the U.S. average in value and ten markets were below.
The Hotel Valuation Index is an indexed value using as a base the 1986 value of a typical hotel in the United States (1986 = 1.000). Each market area is then indexed off this base with a nurnber showing the value relationship of that market area to the base. For example, in 1986, the index for Miami was 1A286 which means that the value of a hotel located in Miami was approximately 43% higher than that of a similar hotel situated in the United States. Amore meaningful comparison would show the value difference between hotels in two cities. For example, say a hotel in Fort Lauderdale sold in 1987 for $65,000 per rooim If a similar hotel was situated in New Orleans it would probably cornmand a price per room of $128,000 in 1990. This would be calculated by taking the 1990 HVI for New Orleans and dividing it by the 1987 HVI for Fort lauderdale to determine the change in value.
Then multiply the 1987 sales price of $65,000 per room by the amount of previously calculated factor yielding the estimated 1990 sales price for New Orleans.
$65,000 x 1.97176 - $128,000
The HVI gives the greatest weight to the income capitalization approach, with secondary support provided by the sales comparison and cost ap proaches. Rooms revenue data was supplied by Smith Travel Research and other valuation parameters came from Hospitality Valuation Services, Inc. Hotel values change over time due to differing earnings expectations and capitalization rates. The HVl was designed to illustrate these changes and to quantify the amount of variance attributable to move ments in both earnings and costs of debt and equity capital.
As long as interest rates remain level, the economy does not decline any further and owners of distressed hotels do not attempt to dump their losers on the market, hotel values in 1991 should generally remain level or show modest improving trends for most areas of the country. Because financing is generally unavailable and transactions are difficult to structure, owners of hotels should hold on to their properties for the next two to four years. Conversely, hotel values seem to be bottoming out and inves tors may have a good opportunity to pick up some real bargains.
The Hotel Valuation Journal