by Stephen Rushmore, CRE, MAI, CHA
The economic recovery of the US lodging industry has had a positive impact on hotel values. Over the last three years, the average value of a hotel has increased over 33%, according to the latest findings of the annual Hotel Valuation Index (HVI), developed by Hospitality Valuation Services (HVS). In 1994, a typical hotel in the United States experienced a 16% increase in value, which compares to a 15% increase in 1993, and an 8% increase in 1992. Prior to 1992, hotel values had fallen two years in a row. The factors contributing to the recent value enhancement include higher occupancies and average room rates, a low rate of expense inflation and a lower cost of capital.
The HVI covers 23 individual market areas as well as the United States as a whole. It is based on occupancy and room rate data supplied by Smith Travel Research, along with local operating performance information and cap rates derived by HVS. The Index reflects market value which assumes a willing buyer and a willing seller.
The increase in value was not uniformly experienced by all twenty-three market areas. During 1994, sixteen markets showed an increase in value, and seven markets exhibited value declines. Dallas registered the highest increase, with a 28% growth rate, while Riverside, California suffered a 20% decline. Between 1986, when the index was initiated, and 1994, Houston and Denver have achieved the largest value gains of 180%, and Riverside has lost a total of 56%.
Based on an analysis of the valuation trends in these twenty-three market areas, at this time I would recommend the following locations as being the most desirable for hotel investing: Boston and Denver, along with Texas, and Southern California in its entirety. On the opposite side of the ledger, Orlando is the only location that gives me some level of concern. If Disney continues its aggressive hotel expansion plans, this market might become overbuilt, which could adversely affect hotels in the market.
While hotel values continue to increase in many areas of the country, active buyers have had difficulty acquiring a good quality hotel product. It seems that hotel owners are still on the sidelines, waiting for further value increases before they offer their properties for sale. During 1992, I observed that hotels with a replacement cost of $100,000 per room were selling for between $20,000 and $30,000 per room. In 1993, this price was up to $40,000 to $50,000 per room. Today, that same quality hotel would probably command $60,000 to $70,000 per room. As market values begin to approach replacement costs, look for more and more hotels being offered for sale as the large number of pent-up sellers start to unload their properties.
The following table shows the percent change in hotel market values for the 23 individual market areas and for the United States as a whole from 1986 to 1994.
The Hotel Valuation Journal