To Buy a Hotel or Build a Hotel?
|by: R. Mark Woodworth, August 2005
When contemplating these sage words uttered by Lincoln over 175 years ago, we once again asked ourselves the question: are the historic market conditions that stimulated new construction in the past now appearing on the horizon? If so, are we likely to see overbuilding in certain markets and/or of certain property types as we have traditionally seen during past lodging recoveries? Or are the market fundamentals different this time such that the equilibrium point at which new hotel development is warranted has shifted? The short answer is ….. perhaps!
The flow of investment capital into the U. S. lodging industry dramatically increased in 2004, and expectations are for more of the same during 2005 and beyond. Key drivers of this market behavior include:
2004 Property Level Operating
While the strong flow of capital into U.S. lodgings has served to escalate hotel property values significantly since 2002, they have yet to reach replacement levels in most markets. The atypically large spread between market values and replacement costs, caused by the decline in real hotel profit levels while construction prices grew dramatically, will likely persist through 2006. As such, building will be difficult for most developers in the near term, and investment dollars will continue to seek existing assets. Rest assured, however, that the cycle will continue to evolve and shovels will be breaking ground in significantly larger numbers well before the end of this decade. Thus, as Lincoln noted, “what has happened will invariably happen again”, only this time a little more slowly than usual.
R. Mark Woodworth is Executive Managing Director of PKF Hospitality Research. He is located in the firm’s Atlanta office.
|Also See:||The Hotel Terminal Cap Rate Delimma / PKF / August 2005|
|Fewer Hotels Deficient on Interest Payments; Low Interest Rates, Refinancing, and Rising Profits Are Major Factors / PKF Study / July 2005|
|Growth in Hotel Food and Beverage Revenues Lack the Same Kind of Sizzle Found in Room Revenues; Expense Controls Help Profits Grow / PKF Study / July 2005|
|Conference Centers in the U.S. Saw Financial Fortunes Turn Around in 2004 after Three Consecutive Years of Declining Revenues; Estimating 9% Increase in Conference Attendance in 2005 / PKF / May 2005|
|President Bush's Push for Tax Reform; Any Impact on the Hospitality Industry? / Kevin F. Reilly / May 2005|
|U.S. Hotels Staff Up - Rising Benefit Costs at Highest in 15 Years / Mark Woodworth / May 2005|
|Hotel Guests Not Picking Up the Phone / Robert Mandelbaum / April 2005|
|Are Hotel Employee Benefits Really Soaring? / Gregory J. Miller and Robert Mandelbaum / March 2005|
|Plying the Per Diems: How Market Forecasts Should Impact Hotel Rate Strategy / Gregory J Miller / PKF / February 2005|
|Double-Digit Profit Growth for U.S. Hotels in 2004 and 2005; Strong Revenue Growth Overcomes Some Expense Concerns / PKF / February 2005|
|Hotel Construction Signs Along the Road to Recovery; Measuring Hotel Developer Intent / R. Mark Woodworth and Robert Mandelbaum / January 2005|
|Understanding the Recovery Occurring in the Meeting’s Market; Surveying the Meeting Planners / Robert Mandelbaum / December 2004|
|First Half 2004 Hotel Profits Solidify 2005 Outlook; Industry Still Lags Far Behind its Past Peak Performance in 1998 / HRG & PKF Consulting / December 2004|
|Room Rates Across the Top 50 Hotel Markets in the U.S. Will Increase by 3.7% in 2004; Five Highest and Five Lowest Average Daily Room Rate Hotel Markets in 2005 / December 2004|
|Perspectives on the Road to Recovery - U.S. Lodging Industry 2005 / HRG & PKF Consulting / November 2004|
|Other Revenue Is Good Revenue / Robert Mandelbaum / November 2004|
|Uncanny! Hotel Occupancies “Key Indicator” of Presidential Election Outcome / October 2004|
|Is the Hotel Industry Smart Enough to Avoid Overbuilding; Ten Reasons Why Real Estate Markets Become Overbuilt / Jack B. Corgel / July 2004|
|PKF Consulting/HRG Survey Forecasts Banner Year for Hotel Transactions; Investors Favoring the Full-service Segment / May 2004|
|First Uptick for Hotel Industry in Three Years; Full-Service Hotels Lead the Way In U.S. Hotel Profits for 2004 / Hospitality Research Group / March 2004|
|Demand in the Full-service Hotel Sector is Expected to Increase by 6.3% in 2004; Best and Worst Hotel Markets in Terms of RevPAR Growth / PKF Consulting / January 2004|