15, 2006 - 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 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 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 Value Increases Moderating: For the next 12 months,
61% of LIIC members believe that hotel values, as a whole, will increase;
32% believe hotel values will be flat. These results are in sharp contrast
to last year’s survey where almost all LIIC members forecasted value growth.
Multiple respondents still believe that increasing hotel construction costs
will drive up the desirability of buying existing assets in contrast to
|2. Upper Upscale Hotel Investor Favorite: Of all the various
hotel rate chain segments, 81% of LIIC respondents believe that hotels
in the highest quality category - Upper Upscale will increase in value
over the coming year. On the other side of the rate scale, 63% anticipate
that values for hotels in the Economy sector will be flat.
|3. Hotel Investment Market Peaking: Lodging industry real estate
leaders believe that we are at or close to reaching the peak of this hotel
investment cycle. A surprising 87% of survey respondents responded that
values will peak in the next 12 months.
|4. Quality and Volume of Product to Buy? Survey results indicate
a lack of consensus with respect to both the quality and volume of hotel
acquisition opportunities. With respect to quality of hotels available
for purchase, hotel investors were all over the board from seeing an abundance
of “pigs with very nice coating of lipstick” to “very high” quality assets.
The volume of hotels appears to be very tenuous with responses ranging
from “high by historic standards” to “thin”. Many buyers are concerned
about “soft sellers” testing the market but not really motivated to sell.
|5. Interest Rates will Rise: LIIC members clearly forecast hotel
mortgage interest rates to rise over the next twelve months although the
significance and magnitude of the increase appears debatable. 97% of respondents
forecast interest rate increases. Members believe that rising rates
will finally begin to have a negative impact on hotel values. Hotel
loan/value ratios are anticipated to remain stable.
|6. Equity Return Rates Have Bottomed Out: Both unleveraged and
leveraged equity investor return requirements appear to be stable for the
next twelve months. This is good news for buyers who may not have to continue
to cut yield expectations to obtain quality product. However, several investors
are concerned that increasing yields available from alternative investments
may begin to cause a flight out of the hotel capital market to other investment
|7. Happy Buyers: Those hotel investors who have purchased hotel
assets over the last 24 months, appear happy with the performance of their
acquisitions. 85% of those surveyed responded that their purchases are
“generally meeting expectations.” More importantly, a large portion of
buyers stated that their acquisitions are significantly surpassing budgets
and investment return hurdles.
|8. New Supply is Coming: LIIC members envision that new hotel
construction (amount of rooms actually under construction) will peak in
2008 with 2009 to follow as another big year.
|9. Room Rates will Grow: Based on overwhelming survey results
(94%), the next 12 months will see continued real (better than inflation)
room rate growth. The flow-through from this rate growth should increase
the profitability hotel investments significantly. In select markets, many
investors are anticipating double-digit rate growth.
|10. Still Good Time to Buy Hotels? 58% of respondents believe
that “Yes, it is still a good time to buy hotels if you are selective”.
In contrast to past surveys, there has been a surge in doubt though with
23% responding “Maybe, but the acquisition must present a compelling case”.
Similar to last year’s survey, hotel investors seem to still prefer urban,
high barrier-to-entry markets as the best bet to make money over the long