Hotel cap rates were mostly stable during the second half of the year in 2018, according to recent research from CBRE detailed in its cap rate survey for United States hotels. Hotel cap rates for central business districts gained three basis points but remained just under 8 percent and below the long-run average. Meanwhile, suburban cap rates increased one basis point to 8.49 percent.
When breaking it down by sector and segment, economy hotels in central business districts experienced the highest basis-point change during the first half of 2018, rising nine basis points to 9.16 percent. The same was true for suburban economy hotels, which saw a five-basis-point gain to 9.68 percent. In both sectors, select-service suburban hotels were the only segment to see a decrease, falling 2 basis points to 8.49 percent. Full-service suburban hotels remain unchanged at 8.17 percent.
Diving down even deeper, CBRE noted that CBD cap rates across Tier I, II and III cities and market segments were flat in comparison to other surveys. When looking it the three metro tiers and hotel classes, CBD economy hotels in Tier I cities saw the only double-digit increase, rising 21 basis points to an 8.78-percent cap rate. CBRE researchers noted that this gain could be due to increasing supply in the economy segment in larger CBDs as visitors opt for cheaper rooms to avoid increasing room rates in these locations.
Three classes experienced declines in CBDs: Tier III select-service (minus two basis points to 8.36 percent); Tier III economy (minus two basis points to 9.6 percent); and Tier I luxury (minus one basis point to 6.39 percent). Although Tier III economy experienced a decline, it also was the highest cap rate out of any of the tiers and classes in the CBD.
In the suburban market, the most significant change during the second half of the year was a 12-basis-point increase to 9.43 percent for economy hotels in Tier I cities. The highest cap rate was for economy hotels in Tier III suburban cities at 10 percent, although that figure declined two basis points from the first half of 2018.
CBRE expects mostly stability for hotel cap rates through the first half of 2019, according to the report. The only exception is that analysts predict Washington, D.C.’s, cap rates will see some decreases in suburban luxury, full-service and select-service hotels.
Researchers also noted that historical charts show a flattening of cap rates since 2017. The reasoning is that because cap rates result from net operating income divided by asset pricing, the sometimes changeable nature of a hotel’s income has been absent lately because of a steady economy. Additionally, CBRE noted that political events have not affected hotel’s ability to price rooms or properties. Also, concerns of oversupply have tapered off to meet hotel demand.