"Capital flows to real estate have been declining since their peak in 1998; however, they remain at high levels relative to historical standards," said Alan Tantleff, Executive Vice President, of Jones Lang LaSalle Hotels. "During 1990 to 1992, the market actually experience outflows. The CMBS market was in its infancy and REITs were out of favor at the time, so nothing was available to replace savings banks, commercial banks and insurance companies who had begun big divestiture programs." 
 
Weak economic data in mid 2001 slowed transaction activity as both buyers and lenders became more conservative in their underwriting criteria.  "As an industry, we appear to be in much better shape today than we were in 1990, and while not a perfect parallel, 1990 was, in fact, the United States' last recession," added Tantleff. "In 1990, we had weak fundamentals � high inflation, weak GDP growth, declining profit margins, and most importantly, negative outflows to real estate."
 
The hospitality industry has enjoyed record profitability during the past few years. GOP has increased to record levels, placing the industry in a better position than that of 1990 to withstand demand shocks. The weak fundamentals in the early 1990s, combined with an exodus of capital, pushed pricing to record lows. Additionally, analysts in 1990 predicted a prolonged malaise. As a result, owners (primarily institutional owners) were inclined to sell rather than wait for a market recovery. Today, the consensus opinion of a deep V recovery is good news for sellers, with buyers not necessarily seeing the deeply discounted pricing.

According to Melinda McKay, Senior Vice President-Research, we are well ahead of historical measures and poised for a V-shaped recovery. "Negative GDP didn't show up until Q3, and it is likely to remain negative until Q3 next year, which equates to nine months. This is shorter than the post World War II average recession period of 11 months, so we are ahead of historical measures.

These forecasts do take somewhat of an optimistic view, although recent indicators, including the overall rise we have seen on the stock market, do give weight to this V style scenario."

To understand why institutions will not dispose of their hotel assets, one must look at the NCREIF returns for a one, five and 10 year period by product type. Until recently, hotels had outperformed other asset classes by a wide margin over both a five-year and 10-year horizon. Institutions and funds with hotel investments generally profited; therefore, it is unlikely that they will abandon the asset class altogether. 

"Funds with large exposure to retail, on the other hand, did not fare quite as well. Therefore, funds are more likely to blame problems on retail rather than hotels," added Tantleff.

In the 1990s, hotels were significantly outperformed by other asset classes. That factor, combined with pressure from regulatory agencies, generated a wave of divestment in the sector. Furthermore, a large percentage of hotels today are owned by hotel companies (both public and private), entrepreneurs and opportunity funds, less likely to "mark to market" and sell, unless absolutely forced to do so.

In essence, Jones Lang LaSalle Hotels predicts a slowing of transactions in 2002. Prices will not be at their peaks as income declines. Cap rates may in fact decrease (at least when applied to trailing earnings) as investors conclude that trailing earnings are not a valid barometer of future performance, so capping historical income is not an accurate indicator of value. 
 
According to Tantleff, the market today can be characterized by one big bid/ask problem. "Sellers and buyers both need to moderate their expectations. When sellers gain confidence that a recovery is underway and that prices may have bottomed out, they will return to the market and pay market prices. Currently, investors are searching for distressed pricing and opportunities greater than might actually exist."

Therefore, Jones Lang LaSalle Hotels does not predict a wave of distressed sales in 2002, but rather an orderly transaction market, characterized by a somewhat lower level of sales (by recent historic levels). Prices may be below their peak, but will not be at extremely low pricing levels. As economic signs become clearer, investors will return to the market with rational pricing expectations. Owners will experience some pressure, but with overwhelming demand relative to the supply of hotels and the absence of panic selling, the market will be dominated by value investors, not vultures.

Jones Lang LaSalle Hotels is the world's leading hotel investment services group. Through its 18 dedicated offices and the Jones Lang LaSalle network of over 7,000 professionals in more than 100 key markets, Jones Lang LaSalle Hotels is able to provide clients with value added investment opportunities and advice.