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The 2005 Lodging Industry Investment Council Top Ten
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LIIC's List of Major Hotel Investment Opportunities and Challenges

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May 25, 2005 - Each year, the think tank members of �LIIC � The Lodging Industry Investment Council� are surveyed to develop a list of the major hotel investment opportunities and challenges for the coming year.  This survey results in the LIIC Top Ten; a well-regarded profile of investment sentiment and attitudes for the lodging industry for the forthcoming 12 months.

All together, the members of LIIC represent acquisition and disposition control of billions of dollars in lodging real estate.  The hospitality industry�s most influential investors, lenders, corporate real estate executives, REIT�s, public hotel companies, brokers and significant lodging equity sources are represented on the council.  LIIC serves as the leading industry think tank servicing the hospitality business (www.liic.ws).

This year�s survey was compiled by LIIC�s co-chairman, Michael Cahill.  Mr. Cahill is president and founder of HREC � Hospitality Real Estate Counselors, a leading national hotel and casino advisory and brokerage firm specializing in lodging property sales, debt refinancing, consulting, appraisals and litigation support. (www.hrec.com). 

The results of the survey are as follows: 

1. Hotel Property Prices:  Almost all LIIC members predict that hotel values will continue their upward growth over the next 12 months.  This trend is being facilitated by improving hotel operating performance, an abundance and diversity of aggressive buyers and a cooperative lending climate.   Overall, LIIC members are highly optimistic about the coming year with a small yet vocal minority thinking values will be flat.

2. Availability and Quality of Hotel Assets:  The volume and quality of hotel assets on the market is anticipated to improve only slightly, with any improvement due to recent high sales prices for highly desirable lodging properties.  Buyers are hoping that sellers will put more quality, institutional product located in gateway cities on the market.  Off-the-market deals are being aggressively pursued as buyers attempt to circumnavigate the competitive bidding process produced by brokered deals.

3. Where Are We in the Cycle?  Similar to last year�s survey, LIIC member responses are widely divergent when asked about when the next "peak" of the hotel investment cycle will occur.  From the hotel operations cycle perspective, top line revenue growth should fuel strong bottom line growth for the next several years.  In terms of the real estate pricing cycle, the results ranged all the way from �we are peaking now� to 2009.  A significant number of participants believe we are currently nearing the cycle peak in terms of asset pricing.

4. Brand Standard:  The hotel brands are expected to be very strict with lodging owners in terms of requiring huge expenditures to maintain ever increasingly stringent product standards.  LIIC members see no relief in sight for hotel owners.  Expensive PIPs (Product Improvement Plans) from major lodging franchisors still remain a threat to investment yields, especially when a change of ownership occurs.

5. Interest Rates:  Interestingly, the majority of LIIC�s members are not unduly concerned about rising debt interest rates.  Almost uniformly, they believe that increasing room rates, higher cash flow from improving operations and possibly decreasing equity yield requirements will mitigate any potential interest rate increases.

6. Required Equity Return:  Equity investor return requirements will continue to be low by historic standards due to pressure from competing buyers with an abundant supply of capital looking to be placed.  Unlevered equity yields from 10% to 12% are now common with cash-on-cash returns dropping to 6 to 8% for highly desirable assets.  Leveraged equity IRR�s in the mid to high-teens will remain commonplace for institutional assets with proven cash flow.

7. How are Investments Faring?  Hotel investors see the deals they made in 2003 and 2004 through rose colored glasses.  Across the board, investors are happy with cash flow performance of recent acquisitions and most state that newly acquired assets are meeting or exceeding original projections. 

8. Whither Condo Hotels?  The condominium hotel craze is expected to continue over the next 12 months and is expected to flourish until perhaps some problem deals or investor lawsuits.  Many members are highly skeptical about the concept and express concern that this trend may not have legs in its current form beyond a couple of years.  However, this is contradicted by many members active in this market.  These players believe that condo hotels have an enduring place, particularly at the upper end of the product segment. A correction in the way deals are structured and a refinement of the process appear to be imminent. 

9. Occupancy and ADR:  In general, hotel occupancy levels are forecasted to increase 2% to 3% over the next 12 months.  LIIC members anticipate average room rate growth to be the major push over the next year with ADR growth nationally possibly hitting 6%.  Some owners and investors anticipate that room rates may hit double-digit growth over the coming year in select markets.  This will be facilitated by hotel demand growth nationally of up to 4%.

10. Where are the Opportunities?  In general, the market areas with the greatest investment potential appear to be in major metropolitan areas on the east and west coast.  Specific markets in which to buy assets now include New York City, San Francisco, Los Angeles, Orlando and Honolulu. 

Contact:

LIIC � The Lodging Industry Investment Council

Co-Chairmen 

Michael Cahill, President
HREC � Hospitality Real Estate Counselors: 
[email protected]

Sean Hennessey, CEO
Lodging Investment Advisors
[email protected]

Vice Chairman

Jim Butler, Partner
JMBM - Jeffer Mangels Butler & Marmaro
[email protected]
 

Also See: The 2004 LIIC Top Ten: An Annual Survey of Lodging Investment Trends and Challenges / June 2004
Top Ten Investment Challenges Facing the Lodging Industry / Lodging Industry Investment Council / April 2002


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