U.S. hotel cap rates remain stable in first half of 2019

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During the first half of the year, capitalization rates for United States hotels remained stable at 8.28 percent, according to a recent report from CBRE.

For the first time since the first half of 2013, cap rates for hotels in U.S. central business districts exceeded 8 percent, rising 3 basis points to 8.01 percent. Across the market classes in CBDs, full-service hotels saw the largest increase in cap rates, growing 6 basis points to 7.75 percent. Economy hotels followed with growth of 4 basis points to a 9.2 percent cap rate. Select-service and luxury hotels both increased cap rates 1 basis point to 8.04 percent and 7.05 percent, respectively.

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Meanwhile, the report showed that suburban hotel cap rates grew 5 basis points to 8.55 percent. Of these hotels, the full-service class again saw the biggest growth, up 8 basis points to 8.26 percent. Economy hotels followed with growth of 5 basis points to 9.74 percent. Suburban select-service hotels grew cap rate 3 basis points to 8.53 percent, while luxury hotels increased 2 basis points to a 7.61 percent cap rate.

Tiered Growth

Cap-rate growth was a mixed bag during the first half of 2019 when examining metro tier data, according to the research.

In Tier I cities in CBDs, economy hotels were clear winners. The segment grew cap rate 12 basis points to an 8.9 percent cap rate. Full-service hotels also experience double-digit growth, increasing cap rate 10 basis points to 7.3 percent.

In Tier II cities in CBDs, full-service hotels experienced the largest increase in cap rate, up 5 basis points to 7.89 percent. The only class to see a decrease was luxury, falling 5 basis points to 7.29 percent.

Finally, in Tier III cities in CBDs, none of the hotel classes grew cap rate. Rather, each declined, with economy hotels falling 9 basis points to a 9.51-percent cap rate. Here, luxury hotels’ cap rate fell the least of all classes, declining 2 basis points to 7.75 percent.

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On the other side of the coin, full-service hotels in Tier I suburban cities experienced the largest growth of all, increasing cap rate 20 basis points to 8.02 percent. Economy hotels here also grew 14 basis points to a 9.56-percent cap rate.

Hotel classes in Tier II suburban cities remained mostly consistent, with select-service hotels staying flat over the previous first half of the year. Economy and full-service hotels each grew cap rate by 3 basis points to 9.77 percent and 8.25 percent, respectively. Luxury hotels fell 3 basis points to a 7.6 percent cap rate.

In Tier III suburban cities, economy hotels recorded the largest overall decline, falling 10 basis points to a 10 percent cap rate. Every other hotel class notched negative growth, with select-service hotels decreasing the least (-1 basis point to 8.62 percent).