CHICAGO—Brokers, owners and valuation experts might not agree on much these days, but most can find common ground on at least one point: Hotel values will be down in 2010.
But ask by how much, and the projections are a bit more vague.
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Jules Marling |
“We keep hearing a lot about appraisals coming in a big wide, crazy range of values right now. That is just a function of the times that we’re in,” said Jules Marling, managing director of Real Estate Research Corporation, during a panel at the Midwest Lodging Investors Summit earlier this month. “We’re definitely in the most unsettled market that we’ve ever been in, which probably creates terrific opportunities for some and terrific distress for others,” he added. “This reflects itself in the prices for which things sell. The ranges are extreme. A lot depends on the availability of financing; the economics of the hotel in questions.”
At least person on the panel was willing to throw out a number. John O’Neill, a consultant and professor at Penn State University’s School of Hospitality Management, said values per room will be down 2.2% by year end, citing results from the Penn State Index of U.S. Hotel Values.
But the United States hotel industry is likely to see a rebound during 2011, when values per room will rise 7.5%, led by an 11% increase in the economy segment, according to the index.
| 2010 value per room US$ | % change | 2011 value per room US$ | % change | |
| Luxury | $249,906 | -1.3% | $265,930 | +6.4% |
| Upper Upscale | $131,995 | -1.8% | $141,474 | +7.2% |
| Upscale | $90,467 | -1.7% | $96,549 | +6.7% |
| Midscale w/ F&B | $53,555 | -5.9% | $54,975 | +2.7% |
| Midscale w/o F&B | $61,467 | -2.2% | $63,651 | +3.6% |
| Economy | $15,797 | -11.2% | $17,531 | +11.0% |
| Total U.S. | $74,787 | -2.2% | $80,424 | +7.5% |
Source: Penn State Index of Hotel Values Determining value
While it’s difficult to give broad-based advice on deriving value for any one particular hotel, O’Neill did share an automated valuation model to at least put you in the ballpark.
-$42,873 (constant)
+ net operating income per room x 5.615
+ average daily rate x 615.039
+ number of rooms x 33.693
+ occupancy x 234.891
= estimated value per room
O’Neill admitted the formula is a bit general, and property specifics should be taken into account when determining value. However, the above model is on average within a 10% range of the actual hotel sale price, compared to appraisals, which vary by only 5%.
Marling shared some of his general methodology as well:
1. Determine normal NOI
While “normal” is a relative term—especially in this era of the “new normal”—Marling said the important thing is to be realistic. Don’t simply assume you’ll return to 2007 operating levels. Survey the demand drivers in your particular market, and draw reasonable conclusions about future performance.
In doing so, factor in the cost to get to normal. If you’ve been putting off a property improvement plan or other capital expenditure, consider those costs in your valuation estimate.
2. Determine cap rate
Once you get to normal, decide what your cap rate would be at that normal. It’s often lower than you might think, Marling said. For a midscale asset, think in the range of 8% to 9%. For trophy assets, it might even be lower, at 6.5% to 7%.
3. Determine the appropriate discount rate
This can be incredibly difficult to determine, given that ranges are so broad, Marling said. A cap rate can be anywhere from 7.5 to 15, and the resulting discount rate might be between 9% and 15%.
“There’s a huge, big range of values, and you just need to concentrate on the process each time,” he said.