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Hotel Investors Look to Cap Rates for Sign of Stabilization

With little good news in the hotel market of late, investors looking for any ray of light at the end of the tunnel may be seeing it in capitalization rates. According to data presented in the summer 2009 issue of the RERC Real Estate Report, unleveraged going-in and terminal capitalization rates on an institutional level declined slightly, to 9.8 percent and 10.4 percent, respectively, during second quarter.

“Given that the number of hotel transactions were down more than 80 percent in the first half of 2009 versus the same period in 2008, there are very few sales and realized cap rates to observe. I would feel more comfortable in seeing a few sales actually closing at these lower required cap rates before I suggested we may be seeing the first hint of stabilization in the market. Even so, this decline in required rates is certainly noteworthy,” stated Greg Kendall, MAI, CRE, and co-director of RERC Hospitality Services. see RERC Hospitality

“With cap rates having increased approximately 250 basis points since the recession began in December 2007, I would expect to see them move up and down a few more times over the next few quarters before we see anything resembling stabilization,” Kendall stated. “Further, there is a large amount of inventory available for sale, including many distressed properties. With motivated sellers of these distressed properties, prices should experience downward pressure, and this could raise cap rates again before the dust settles. With the growing number of distressed properties, there should be some fantastic opportunities in the next 6 to 12 months, for those investors with cash in hand or financing options available.”

According to RERC’s historical capitalization rates, current rates compare favorably to those experienced during the real estate crisis of the early 1990’s. “In the early 1990’s, we were seeing cap rates of 11 and 12 percent. I don’t think we are necessarily headed there now, however. I expect hotel rate trends to track along with other real estate types. The spreads might vary, but the direction should generally be the same,” Kendall continued.

Kendall also noted that unleveraged cap rates for the hotel sector continue to increase on a regional basis, and any stabilization we see in the market is tenuous, at best. “The sector has a lot to work through. The risks associated with continuing declines in the occupancy rate, the average daily rate (ADR), and revenue per available room (RevPAR) cause many investors pause. Smith Travel Research projects RevPAR to drop 17 percent by year-end 2009, with a further decline of 4 percent in 2010. Any additional shock to the economy, including a resumption of higher gasoline prices, is likely to negatively affect the travel and tourism market even more,” he explained.

Founded in 1931, RERC is recognized throughout the industry as one of the nation’s most respected firms dedicated to independent investment research, valuation, commercial real estate consulting, independent fiduciary services, and litigation support. Current going-in and terminal cap rates are determined by surveying institutional investors and are reported each quarter in the RERC Real Estate Report; historical cap rates are available through membership to the RERC DataCenter™.

Hotel Investors Look to Cap Rates for Sign of Stabilization :: Questions