2008 Hospitality Investment Survey

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the 2008 Hospitality Investment Survey.

A year ago, in the 2007 edition of Hospitality Investment Survey, we stated that “the lingering question on investors’ minds is how to maximize yield in a capital induced frenzy of lowered revenue growth expectations, increasing upward pressure on operating costs and questionable exit expectations further on the horizon”. As we now enter the second quarter of 2008, it is evident that liquidity in the market has been drastically reduced, RevPAR expectations have been revised downward, and transactions have slowed considerably.

The forecast of sluggish demand growth for 2008 occurs during a period of increases in lodging supply. In 2008, we estimate that a net count of 115,000 new rooms will become available. With demand for hotel rooms lagging supply of new inventory, the U.S. national average occupancy rate is expected to decline a full point from 63.2% in 2007 to 62.2% in 2008. We expect ADR’s to increase above the rate of inflation in 2008 with an increase of 4.7%. The forecast RevPAR gain of 3.0% should translate into a 3.0 percent gain in total revenue for the average hotel in 2008. Hotel managers will do their best to control their costs, but we are projecting an anemic 1.7% increase in unit-level profits for the year.

The uncertainty of the capital markets and the declining growth in income projected for the hotel market has increased the perceived risk premium for most hotel investors. As a result, the difference between current hotel owners/sellers expectations and buyers today is very wide. Investors are fearful of near-term downside risk and see uncertainly and unreliable upside. This will result in fewer transactions in the near term. Survey respondents indicated that they are considering fewer purchases in the first and second quarters. As the capital markets begin to stabilize and attendant risk premiums begin to moderate, our survey of hotel investors anticipates an accelerated pipeline of new transactions. It will be up to the sellers to determine if they want continued dividends (hold) or redeploy capital (sell). As investment bankers have exited the market, traditional commercial banks and institutional money will provide the majority of capital for hotel investors. This will limit the size of any one transaction forcing portfolio and large dollar ($50 million+) transactions to occur in late 2008 or 2009. Property appreciation, as seen during the past several years, is not expected to be realized in the short term.

As one respondent to our survey indicated, “the party is over”. Most investors noted that this time around, the downturn in the lodging sector will be short-lived due to moderate increases in supply and continued upward pressure in construction costs. Once the liquidity crunch/crises moderates, market fundamentals such as supply/demand balance and anticipated growth in NOI will be the focus of hotel investors. The expectations favor capitalization rates to rise and that hotel values in the short term will decline. Only those sellers that have to sell – will, and at a discount. As in past downturns, distressed hotel sales taint the overall health of the hotel investment market. Those owners with good quality assets in premium locations will hold for dividend yield and wait for the next cycle.

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In addition to topical articles, the 2008 Hospitality Investment Survey contains several charts displaying current investment criteria and mortgage terms for U.S. hotel transactions. To purchase a copy of the report, please visit our website at www.pkfc.com/store.