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Hotel Real Estate Transactions During the First Eight Months
of 2002 - Way Down, But Not 'Way Different'

by: John. B Corgel, Ph.D. and Kristin Rohlfs 

Hotel real estate transaction volume in the U.S. during the first eight months of 2002 slowed to about 40 percent of the volume recorded in 2001, 2000, and 1999. The Hospitality Research Group of PKF Consulting (HRG) identified 173 sales year-to-date (September 1st) compared to 462, 553, and 409, respectively during the same period of the past three years. Why has the hotel real estate market stalled? Some possible explanations include: 

  • Reluctance by mortgage lenders to take positions in hotel markets damaged by recession and the terrorists attacks of last year.
  • Large bid/ask spreads created by a lack of high yielding reinvestment opportunities for sellers and high return requirements of buyers.
With such a severe slowdown in transaction activity, one might expect to find that the type of properties sold during 2002 substantially differs from the compositions observed in recent years. For example, properties sold in down markets may be smaller, older, and more likely non-chain affiliated compared to periods in other parts of the real estate cycle. Hotel property investors may �flee to quality� (i.e., also cash and other real assets, such as gold) as do investors in securities during times of economic uncertainty. If investors behave in this way, then relatively more poor quality assets trade as investors prune portfolios. Also, the average price-per-room (PPR) should fall on a relative basis to meet elevated internal rate of return requirements.

Comparison of Hotel Transactions 

An examination of transaction information indicates no meaningful differences in property characteristics and pricing for hotel that sold during the first eight months of 2002 compared with those that sold during the same period of the last three years. Exhibit 1 shows that the average PPR for all, full-service, and limited-service hotels was not materially different in early and mid-2002 than during comparable periods of 1999, 2000, and 2001. Also, the distribution of sales between full service and limited service remained fairly constant during the same periods of the last four years.

Exhibit 1
Hotel Real Estate Sales Activity
January 2002 Through August 2002 and Same Period of Prior Years
(Average Price Per Room Inside Bars)

*First eight months of each year; 2002 data are preliminary.
Source: HRG Transaction Database; Original sources include CoStar, HMBA, various publications

In Exhibit 2, information is presented on room count, chain affiliation, and the age of hotels that sold from January 2002 through August 2002 versus those sold during the same period in recent years. As with PPR, none of these characteristics distinguishes the transactions in 2002 from transactions in 1999, 2000, and 2001. 

Exhibit 2
Characteristics of Hotel Real Estate Transactions
January 2002 Through August 2002 and Same Period of Prior Years

Source: HRG Transaction Database; Original sources include CoStar, HMBA, various publications

Why no differences? 

The 60 percent decrease in hotel real estate transaction volume during the first eight months of 2002 comes as no great surprise. Economic downturns rarely provide healthy breeding grounds for real estate buyers and sellers to come together. The fact that the characteristics of hotels trading in 2002, especially the average PPRs, have not changed from recent years also may be explained. 

Hotels in the U.S. experienced large revenue declines during late 2001 and 2002, but only modest reductions in net operating incomes and before-tax cash flow. Expenses, particularly labor and interest costs, fell along with revenues, which help support asset pricing and reduce motivation to sell at discounts. This trend may not reverse until hotel investment returns decline or bond yields and stock market returns increase. Hence the hotel real estate market shrunk in 2002, but did not change in any fundamental way.

John B. (Jack) Corgel, Ph.D. is the Managing Director of Applied Research for the Hospitality Research Group of PKF Consulting. Kristin Rohlfs is a Senior Research Associate. Both work in the firm�s Atlanta office.

###

For additional information contact 
Jack Corgel
Managing Director
The Hospitality Research Group
3340 Peachtree Road, Suite 580
Atlanta, GA 30326
(404) 842-1150, ext 227


 
Also See Hotel Loan Problems On the Rise Again; Prolonged Hotel Market Weakness Taking a Toll / PKF Consulting / March 2003
RevPAR Decline Only Tells Part Of The Story; Drop In Hotel Profits Is the Real Concern / PKF Consulting / Jan 2003
Managing Interest Payments / Alexander Feneck, Hospitality Research Group of PKF Consulting / Dec 2002
By Mid-Year 2002, Hotel Profits Were Again Down, But Not Out; RevPAR Decline Only Tells Part Of The Story / PKF / Nov 2002
Optimism and Budgeting / Alexander Feneck, Hospitality Research Group of PKF Consulting / Nov 2002
With Hotels, Does Spending Money Make Money? / Robert Mandelbaum / Sept 2002
What Made Profits Drop in 2001? / PKF Consulting / Oct 2002
Commissions in the Hotel Industry: Agents for Change? / Robert Mandelbaum / PKF / Aug 2002
Will Hotel NOIs and Property Prices Follow Revenues in Their Downward Spiral? / John (Jack) B. Corgel, Ph.D / Hospitality Research Group of PKF Consulting / June 2002
Hotel Room Sales Now Unaffected by Travel Fears; Only Economic Conditions Affecting Demand in Most Markets / August 2002


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