HVS Report - Impact of Countervailing Forces on Hotel Values and Cap Rates - By Suzanne Mellen


After more than five years of relative stability, new factors are at play in the hotel investment market that will affect hotel capitalization rates and values in a changing economic landscape. Hotel sales transaction activity declined in 2017, while cap rates continued to rise modestly, and hotel values held stable. The outlook for 2018, while uncertain because of the changing political and economic landscape, is more positive than a year ago due to the tax reform’s favorable treatment of commercial real estate and a more optimistic business environment. This article presents recent trends and a sensitivity analysis illustrating the potential impact of these forces.

It’s hard to ignore the changes afoot in the U.S. political and economic landscape. While the impact of deregulation, anti-immigration activity, and the Tax Cut and Job Creation Act of 2017 (TCJA) have yet to be felt or measured, the lodging industry is operating on a platform of shifting sands. Slowing RevPAR and NOI growth, coupled with rising interest rates, further cloud the outlook. Only time will tell how our industry will fare, but the pros and cons can be weighed in the interim to assess the potential impact on hotel cap rates and values.

Hotel sales transaction activity provides a gauge for assessing asset value and cap-rate trends. While total 2017 U.S. hotel sales volume (based on preliminary data reported by Real Capital Analytics) reached $27 billion, a decline of 25.0% from the $36 billion level reached in 2016, individual sales transactions, which accounted for 82.0% or $22.2 billion of the total volume, declined by only 2.3%. Approximately $8 billion of the decline in transaction sales volume was due to significant declines in portfolio and entity transactions, which in turn were dominated by Chinese investment in 2016. Portfolio and entity volume declined by 25.0% and 87.0%, respectively. Cross-border transaction activity, as tracked by RCA, declined by 69.0%, from $11.6 billion to $3.6 billion; almost the entire $8-billion decline in offshore activity can be attributed to a pullback by Chinese investors.

The average price per key (PPK) derived from the total sales volume increased by 3% in 2017, from $134,000 to $138,000. Major hotel sales volume, defined as those that sold for a price of $10 million and over, declined by 29%, and the average PPK held steady at $222,000 per room. Sales volume of assets priced at $10 million and under remained stable, as did the average PPK. The lower average PPK should not be viewed as a decline in hotel values, as this metric is affected by the composition of assets sold. Fewer large, high-priced hotels in coastal metro areas sold in 2016 and 2017, thus affecting the PPK; secondary markets with more potential for upside were favored by investsors. In summary, the hotel transaction market was active and steady in 2017, despite the concerns and pullout of some investors.

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