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Cornell Study Finds High-End Hotel Transaction Prices are Moderating
While Small Hotel Deal Pricing Continues to Increase
Ithaca, NY, February 8, 2013 - The Cornell index of hotel industry real estate transactions has identified a slowing of price increases for large hotel properties in the fourth quarter of 2012, while prices for small hotels were still rising at the end of last year. Moreover, as a result of the moderating price growth for high-end hotels, construction costs for new five-star hotels are now equal to the price of existing high-end hotels. Additionally, as income growth begins to decline, the price growth of both large and small hotels will continue to slow. These are the key points of an analysis found in the latest edition of the Cornell Real Estate Market Indices, which is available at no charge from the Cornell Center for Real Estate and Finance.

The analysis covering the fourth quarter of 2012 is detailed in "Cornell Hotel Indices, Fourth Quarter 2012—Price Growth Is Moderating: A Return to Normalcy?," by Crocker H. Liu, Adam D. Nowak, and Robert M. White, Jr. Liu is the Robert A. Beck Professor of Hospitality Financial Management at the Cornell School of Hotel Administration, Nowak is an assistant professor at West Virginia University, and White is founder and president of Real Capital Analytics, which provides data for the Cornell indices. Other data are drawn from the CoStar database.

"We found that the fourth quarter was an active period for both large and small hotel transactions," said Liu. "Our break point for a large deal is a price of $10 million or more, and we recorded 75 large transactions in the fourth quarter 2012. That was a 74 percent increase from the same time in 2011. Small transactions increased 21 percent over the previous year's fourth quarter to 138 sales. In all that activity, though, the price trends seem to be changing and the net operating income gains are clearly fading, both for large and small properties. So, as a result, we expect the prices for small deals to start easing off even though the momentum was favorable in the last quarter. This doesn't mean that price growth is ending. It's just slowing down."

The Cornell analysis also found that hotel properties are experiencing a widening premium relative to other property types in terms of financing costs. This increased premium for hotels signals investors' perceptions of a higher risk for both high-quality and lower-quality hotel properties, as compared to other types of real estate.

A comparison between the hotel indices and other measures of business confidence confirms the expectation of continued moderation in the prices for large hotel deals. For example, the Institute of Supply Management Purchasing Managers' Index (ISM PMI) acts as a leading indicator of large hotel prices because it is also a proxy for the overall U.S. economy. The PMI dropped toward 50 percent in the fourth quarter of 2012, which is the break point between economic growth and contraction in terms of the ISM's expectations. Another forward-looking measure, the Consumer Confidence Index from the Conference Board, is a leading indicator for low-price hotels. That measure eased a bit in the fourth quarter after a year-long up trend, confirming expectations of a moderation in prices for smaller hotels in 2013.

About the Cornell Real Estate Market Indices
The Cornell hotel market indices comprise three quarterly metrics that monitor real estate activity in the hotel market. These are a large hotel index (hotel transactions of $10 million or more), a small hotel index (hotels under $10 million), and a repeat sales index (RSI) that tracks actual hotel transactions. These indices are constructed using the CoStar and RCA commercial real estate databases. The large and small hotel indices are developed in the same fashion as the consumer price index, while the repeat sale hotel index is analogous to the retail concept of same store sales. These measures provide a more accurate representation of the hotel real estate market conditions than do the commonly reported average transaction prices, because the average-price index doesn't account for differences in the quality of the hotels, which also are averaged. A more detailed description of these indices is found in the first edition of this series, "Cornell Real Estate Market Indices," which is available at no charge from the Cornell Center for Real Estate and Finance.

About the Center for Real Estate and Finance

Established in 2009, the Center for Real Estate and Finance provides a platform for educating students, creating new knowledge through research activities, and exchanging information about real estate with a broad set of audiences. CREF is at the forefront of research in all areas of commercial real estate, from the study of the behavior of real estate assets in investment portfolios to an understanding of real estate capital markets to the science of hedging real estate risk. To learn more about CREF, visit


Jane Henion

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