Headlines – Week of November 20, 2011
November 29, 2011
Lodging Asset Values in Recovery
Despite inconsistent economic news, increases in lodging demand and property-level net operating income (NOI) have most industry participants feeling optimistic that hotel property values are heading upward. The 2011 edition of the Hospitality Investment Survey conducted by PKF Consulting sheds some light on the market and transaction factors that are influencing this line of thinking.
Here are some the findings from the survey:
- Overall capitalization rates for all hotels decreased 110 basis points when compared to 2010. This reflects survey respondents’ reaction to the more attractive debt environment, as well as the anticipation that property level NOI will continue to increase. Investors continue to place a premium on the full service segment due to its greater upside, high barriers to entry and the current difficulty to obtain construction financing. Terminal capitalization rates also declined compared to our previous survey, however to a lesser degree.
- Concurrent with the decline in capitalization rates, discount rates, or un-leveraged IRR’s, for hotels decreased to 11.75 percent. The 253 basis point spread between the overall capitalization rate and discount rate suggests investor yield requirements have lowered when compared to last year, likely due to the decreased level of risk and overall landscape of the current lodging market.
- Equity yields followed a similar downward trend, though hotel investors continue to expect handsome returns when compared to other forms of investment real estate. Cash-on-cash returns experienced little change compared to what we learned in 2010, and the average holding period indicated by the survey respondents decreased slightly.
- Overall deal volume, particularly among real estate investment trusts (REITs), has surged since the beginning of 2011. With a lower overall cost of capital and financing flexibility that includes equity along with debt, REITs are aggressively targeting hotel properties in all segments, particularly high quality assets in major markets. Leading the way is Ashford Hospitality, who spent $1.28 billion on the 28-property Highland Hospitality portfolio. Pebblebrook Hotel Trust (spending over $780 million on 10 hotels) and Apple REIT (spending roughly $475.8 million acquiring over 20-hotels) have also been active players.
- Debt service coverage ratios also decreased and are now in line with 2008 levels, suggesting that lenders are starting to “loosen up” with regards to their underwriting. This year’s survey indicated that interest rates reached their lowest point in recent history at 6.69 percent, a decrease of 84 basis points when compared to 2010. Loan-to-value ratios increased compared to last year, but remain well below 2007 levels.
2012 Outlook Remains Positive for U.S. Lodging Industry
PKF Hospitality Research also released their preliminary Hotel Horizons® updated forecast for the U.S. lodging industry. Based on performance data through September of 2011 (provided by Smith Travel Research), and Moody’s Analytics’ October 2011 domestic economic forecast, PKF-HR believes that RevPAR in the U.S. will increase by 8.1 percent in 2011, and rise another 6.2 percent in 2012.
The 8.1 percent revised RevPAR forecast for the current year represents a 90 basis point increase over their previous forecast released earlier this year.
Because of the accelerated performance in 2011, the PKF forecast change in RevPAR for 2012 has been lowered 110 basis points from 90 days ago to still-attractive 6.2 percent.
PKF is optimistic for lodging’s performance in 2012 and is based on the economic forecasts of Moody’s Analytics. Real personal income is projected to rise, and is the most important element of Gross Domestic Product (consumer spending and business investment).
Best Housing Markets for Big Bargains
A recent report from the financial analysis firm 24/7 Wall St. has identified the housing markets expected to offer some of the biggest discounts for home buyers. Many of these markets have been plagued with large gluts of foreclosures that have dragged down prices. Six of the ten markets on the list have had median home prices fall to less than half what they were five years ago.
All of the top 10 most popular metros have experienced double-digit price declines from peak to trough, with seven out of 10 experiencing declines approaching 50 percent or more, according to figures from the Federal Housing Finance Agency.
Half of the top10 metros are in Florida, two are in Southern California, and one is in Nevada — specifically the Las Vegas metro area.
Eight out of 10 metros had median list prices of less than $150,000 as of Nov. 15, with the exceptions of both California markets.
The following are the top five housing markets which offer home buyers some of the biggest discounts:
1. North Port-Bradenton-Sarasota, Fla.
Median home price: $170,000
Home value decline from peak: -51.4%
Predicted change in home value through 2Q 2012: -6.5%
2. Riverside-San Bernardino-Ontario, Calif.
Median home price: $180,000
Home value decline from peak: -55.4% (14th biggest decline)
Predicted change in home value through 2Q 2012: -14.8%
3. Charleston-North Charleston, S.C.
Median home price: $200,000
Home value decline from peak: -23.3%
Predicted change in home value through 2Q 2012: -1.6%
4. Fort Lauderdale-Pompano Beach, Fla.
Median home price: $199,000
Home value decline from peak: -48.4%
Predicted change in home value through 2Q 2012: -9.2%
5. Cape Coral-Fort Myers, Fla.
Median home price: $106,000
Home value decline from peak: -59.3%
Predicted change in home value through 2Q 2012: -12.2%
Posted by Scott R. Lodde