U.S. Hospitality Sector in Early Stage of Recovery

15 Sep, 2010, New York

Cushman & Wakefield today released a Business Briefing on the hotel investment sector indicating that after recent historic lows, the U.S. hospitality industry appears to be entering the early phases of a recovery from the standpoint of both fundamentals and transactions. The report entitled On the Minds of Hotel Investors, points to year-to-date improvements in occupancy and revenue per available room (Rev Par) combined with a moderating average daily rate (ADR). In addition, transaction volume, which has plummeted in recent years, is now showing its first increase since 2007.

"The hotel investment sector certainly has a long way to go in order to re-gain previous levels of normalcy," said Eric Lewis, executive managing director of Cushman & Wakefield's Hospitality and Gaming Group. "However, recent data has started to trigger investment interest, particularly in seasoned assets with demonstrated operating performance."

According to Mr. Lewis, in order to justify acquisitions in today's market, investors are relying on projected NOI as a key determinant of value as opposed to in-place NOI, and are shifting their forecasted return to peak levels anywhere from three to five years out.

According to the report, investors keen on taking early positions in the sector are now considering the "intrinsic" value of a property relative to replacement cost and/or peak historic values in making investment decisions.

After raising large amounts of capital, investors are under intense pressure to put those assets to work, yet they are faced with a scarcity of quality assets on the market - especially assets with long operating histories. This scenario is driving the most recent trend whereby any institutional-grade hotel property exposed to the market is met with numerous highly competitive bids that are often based on anticipated NOI projections as opposed to traditionally relied upon in-place revenues. This has driven cap-rates, or initial yields, extremely low relative to alternative investments.

The report concludes that if the hotel market continues to mature, we are likely to see more "traditional" valuation methods take hold, but until then, the current model is likely the only successful one.

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