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The 2010 Lodging Industry Investment Council Top Ten:
Annual Survey of Lodging Investment Trends

 

Hotel Investment Market Bottoms Out; But Caution Abounds

May 6, 2010 - Annually, the members of the hotel’s industry’s preeminent think tank, “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 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.

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, Mike Cahill. Mr. Cahill is CEO and founder of HREC – Hospitality Real Estate Counselors, a leading international hotel and casino advisory and brokerage firm specializing in lodging property sales, debt refinancing, consulting, appraisals and litigation support. (www.hrec.com). 

1.       Hotel Investment Market Bottoms Out, But Caution Abounds: Compared to last year, hotel investment market participants believe the worst is over, both from the perspectives of operating fundamental and investment risk perception. Transaction activity (property sales volume) is forecasted to increase significantly with higher values for sellers. However, uncertainty over macroeconomic issues still loom, producing an overall mood best characterized as “cautious optimism”.

2.       Lodging Real Estate Values Rebounding: 75% of respondents believe that hotel real estate values will increase over the next 12 months, with 42% of total responders predicting a significant increase of over 5%. This is in sharp contrast to last year’s survey when 81% believed values were decreasing. 

3.       New Investment Cycle?: Interestingly, only 53% (down slightly from 61% last year) believe we are in the first inning of a new hotel real estate investment cycle.  A substantial 39% think we are still in market limbo, with the new cycle not yet started. 

4.       Quality and Volume of Product to Buy? Hotel investors are bemoaned by the lack of available hotels for purchase (quantity), with 95% responding that available product is “below average” and “low” in terms of volume. Investors are further frustrated by the lack of quality (desirable) of assets on the market with 64% believing that current market product is below average quality.  31% believe that hotels on the market are of average quality. 

5.       Where to Find Hotels to Buy? The majority of those surveyed believe that the highest percentage of hotels they buy will come from traditional sources (equity principal to equity principal). In terms of other sources, an equal percentage of buyers believe they will get their deals from traditional balance sheet lenders via REO’s/short sales or buy through acquiring the notes (loan to own). Unexpectedly, in fourth place, is acquiring REO’s from special servicers.

6.       Investors still Cautious: 56% of survey participants believe it is a good time to buy lodging assets but caution to be extremely selective. A lesser percentage, 28% say now is definitely a good time to acquire. 

7.       Are All Cash Buyers King?  Contrary to recent sales activity, 53% of respondents believe that over the next 12 months, less than half of all hotels acquired will be purchased on an all cash basis. An interesting quagmire given that the same respondents consistently cited the lack of suitable acquisition debt financing.

8.       Interest Rates to Increase? 47% of the LIIC think tank believes hotel interest rates (senior debt) will increase over the next twelve months. 33% believe interest rates are stable.  Hand-in-hand, 53% of respondents believe loan/value ratios will remain level with a strong minority (38%) being positive thinkers, believing banks will loosen and increase ratios. 

9.       Significant Change: Equity Return Rates Decreasing: Bucking a trend from our 2008 and 2009 surveys, the majority (50%) of respondents believe that unlevered equity rates will decrease over the next 12 months reflecting increased competition amongst buyers for scarce product. Reasons for the decline cited include: lower perceived risk (increased industry transparency), greater stability and predictability of hotel cash flows) and too much money in the market causing buyers to move up narrowing bid/ask spread.  39% of respondents believe equity rates will be stable (remain the same) 

10.   Occupancy and ADR Fundamentals Hotel investors appear bullish on revenue fundamentals with 78% predicting that average occupancy levels will increase moderately in the next year. Furthermore, 64% of responders believe overall room rates will be up 1% to 5% over the coming 12 months. 



LIIC – The Lodging Industry Investment Council 
www.liic.ws

Co-Chairmen

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Also See: 2009's Top 10 Hotel Investment Trends and Challenges Released by The Lodging Industry Investment Council (LLIC) / May 2009
The LIIC Top Ten: 2007 Survey of Lodging Investment Trends and Challenges / May 2007
The 2006 LIIC – The Lodging Industry Investment Council - Top Ten: An Annual Survey of Lodging Investment Trends and Challenges / May 2006
The 2005 Lodging Industry Investment Council Top Ten; LIIC's List of Major Hotel Investment Opportunities and Challenges / May 2005
The 2004 LIIC Top Ten: An Annual Survey of Lodging Investment Trends and Challenges / June 2004
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