Industry Research
February 7th, 2013 | David Eisen

Cornell study finds prices for high-end hotel sales moderating

7 Feb, 2013 By: David Eisen

A new study put out by the Cornell Center for Real Estate and Finance found a slowing of price increases in hotel industry real estate transactions for large hotel properties in the fourth quarter of 2012, while prices for small hotels were still rising toward the end of last year. (Follow this link for a copy of the report in its entirety.)

Additionally, as a result of the moderating price growth for high-end hotels, construction costs for new luxury hotels are now equal to the price of existing high-end hotels, the report in the latest edition of the Cornell Real Estate Market Indices said. Further, as income growth begins to decline, the price growth of both large and small hotels will continue to slow.

The analysis, "Cornell Hotel Indices, Fourth Quarter 2012—Price Growth Is Moderating: A Return to Normalcy?,"  covered the fourth quarter of 2012 and was authored by Crocker H. Liu, Adam D. Nowak and Robert M. White, Jr.

"We found that the fourth quarter was an active period for both large and small hotel transactions," said Liu. "Our break point for a large deal is a price of $10 million or more, and we recorded 75 large transactions in the fourth quarter 2012. That was a 74 percent increase from the same time in 2011. Small transactions increased 21 percent over the previous year's fourth quarter to 138 sales. In all that activity, though, the price trends seem to be changing and the net operating income gains are clearly fading, both for large and small properties. So, as a result, we expect the prices for small deals to start easing off even though the momentum was favorable in the last quarter. This doesn't mean that price growth is ending. It's just slowing down."

The Cornell analysis also found that hotel properties are experiencing a widening premium relative to other property types in terms of financing costs. This increased premium for hotels signals investors' perceptions of a higher risk for both high-quality and lower-quality hotel properties, as compared to other types of real estate.

A comparison between the hotel indices and other measures of business confidence confirms the expectation of continued moderation in the prices for large hotel deals.

Meanwhile, a new report released by HVS shows that while hotel development on a national basis is expected to be constrained over the next few years, there are pockets of new supply coming up in markets such as Detroit, Chicago and Austin, Texas.

The 2012-2013 HVS Hotel Development Cost Survey incorporates a range of data sources including development budgets, material and labor costs indexes, and input from industry professionals, to track hotel construction costs in the U.S.

"We have also noticed a variety of interesting trends that have emerged in the last 12-24 months," said HVS San Francisco SVP Elaine Sahlins, author of the survey. "Trends that have emerged in the last 12 to 24 months include an increase in proposed select-service hotels in suburban and urban areas and the construction of major convention hotels in a number of central business districts. Conversely, we are not seeing new luxury hotel and resort development being proposed, due to a feasibility gap between economic value and development costs.

"Financing and feasibility constraints have sidelined developments at the high end of the hotel spectrum. Hotel development costs continue to escalate, but as markets recover and occupancies reach or exceed prior peak levels—enabling operators to drive average rate growth—we are seeing opportunities for new projects."

For a copy of the survey, follow this link.

Topic : Cornell, HVS
External Source : Cornell University, HVS

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