May 8, 2009 - Since 2003, the members of the hotel industry’s preeminent
think tank, “LIIC – The Lodging Industry Investment Council," are surveyed
annually to develop a list of the major hotel investment opportunities
and challenges for the coming year. This exhaustive survey results in the
LIIC Top Ten; a highly regarded profile of investment sentiment and attitudes
for the lodging industry for the forthcoming 12 months.
1. Lodging Real Estate Investment Will Get Worse Before
It Gets Better: Overall, hospitality investors believe that recession
will last for 6 to 9 more months, hotel values will continue to decline,
operating fundamentals will deteriorate further and debt financing will
be difficult for the foreseeable future.
2. Lodging Real Estate Values Continue to Drop: 81% of respondents
believe that hotel real estate values will continue to decrease over the
next 12 months, with 52% predicting a significant decrease of over 5%.
In terms of chain scale, upscale hotels are forecasted to have the largest
value drop. Anticipated sharp decreases in RevPAR and a lack of available
debt financing appear to be the primary drivers for past and future value
3. Deals Gone Bad?: 96% of investors believe their assets
purchased in 2007 and 2008 are “underperforming compared to expectations;”
a stark contrast when compared to previous years but expected results given
4. Beginning of New Investment Cycle?: First time in five years,
61% believe we are in the first inning of a new hotel real estate investment
cycle. On the other hand, 39% are unsure if we have either reached the
bottom of the last cycle or if we have made it through the first inning
already (there is currently no game). 44% of members believe the economic
recession will be over within 9 months and 56% are more pessimistic, predicting
the recession will last up to 18 months.
5. Quality and Volume of Product to Buy?: The quality (desirability)
of assets on the market appears to have diminished significantly in 2009
compared to 2007 and 2008. 38% believe that hotels on the market are average
quality but 55% believe they are below standards. Compounding the quality
issue, 88% believe the quantity of available product is “below average”
6. How Will You Invest in Hotels Today?: 41% of the group is
planning on acquiring assets directly from lenders (REO) with an equal
percentage of respondents seeking to acquire notes (loan-to-own and performers).
In terms of financing, 44% of respondents intend to do all cash deals,
31% will seek traditional mortgage financing or traditional plus mezzanine
and 25% claim that they are sidelined because they cannot find debt financing.
Of particular note, 92% of investors indicated that they had not closed
a deal in 2009.
7. Interest Rates will Increase: 56% of the LIIC think tank believes
hotel interest rates will increase over the next twelve months. Interestingly,
15% believe interest rates are “going down” and the remainder of the group
predict that interest rates will remain “flat.” Hand-in-hand, 87% of respondents
believe loan/value ratios will either “remain level” (66%) or “decrease”
8. Debt Availability?: Consistently among responders, the mortgage
capital crisis dominated concerns. The lack of availability was first,
followed by cost (interest rates), amount (loan/value ratios) and need
for recourse by sponsors.
9. Equity Return Rates Increasing: Continuing a trend seen for
the first time in 2008, majority (67%) of respondents believe that unlevered
equity rates will increase over the next 12 months. Respondents generally
pointed to increased perceived risk as the driver of increased equity rates
of return requirements.
10. Hotels Under Construction have Peaked: 68% of the LIIC Think
Tank believes that new hotel construction (amount of rooms actually under
construction) has already peaked. Another 24% believe the peak will be
reached in 2009.