A recent survey of hotel capital providers found that appraisals remain the biggest factor in their lending decisions. The survey, which was sponsored by Hotel Source, a Chicago-based hotel real estate brokerage and advisory services firm, found that appraisals are even more important to lenders than a hotel’s net operating income (NOI) or broker’s opinion of value. This news should be informative to hotel owners and managers, and reassuring to those who appraise hotels, but the study also indicated there’s room for improvement in hotel appraisals.

The Hotel Source survey suggested there are a couple of common shortcomings in many hotel appraisals. First, according to Hotel Source, because some appraisers arrive at a theoretical approach to value, they don’t accurately convey true market value. “There is a business-specific knowledge that is oftentimes overlooked,” says Steven Marx, president of Hotel Source. Often, appraisers undervalue hotels because they fail to recognize the business component.

A second problem cited by the survey is that many appraisers don’t have specific knowledge of the lodging industry. This problem could be a direct cause of the first problem, as well as having other implications.

The optimal resolution for hotel owners and lenders alike is for hotel appraisals to be conducted by appraisers who specialize in that property type. Appraisers who spend time valuing office buildings, strip centers and apartment buildings are unlikely to have the resources to remain current regarding the parameters and metrics of hotel buyers, sellers and lenders.

One aspect of the business component of hotels making them unique is that whereas office buildings, strip malls and apartment houses usually operate with one-to-five-year leases, hotels typically operate with one-to-two-night “leases.” This difference makes hotels significantly more labor intensive, but also better able to quickly react to and take advantage of improving economic conditions, as we’re now experiencing in many markets.

Another unique aspect of the business component of hotels is their branding and/or goodwill from being intensely managed and marketed. This aspect not only makes hotels different from other types of real estate, but it can vary based on the hotel name or brand, its management and its location. Such important nuances are unlikely to be fully understood by appraisers not specializing in valuing hotels.

I submit that the best way for lenders to continue to be satisfied with the usefulness of hotel appraisals is for those conducting hotel appraisals to specialize in that property type and to remain current regarding the parameters and metrics of hotel buyers, sellers, and lenders.

Penn State Index
The Penn State Index of U.S. Hotel Values econometric model currently projects overall hotel values will decrease 2.2 percent this year. Economy hotels are expected to register the largest percentage drop in value, with an 11.2-percent decline. Next year, overall hotel values are anticipated to increase 7.5 percent, with all hotel types expected to record increases in value, and luxury hotels anticipated to show a particularly noteworthy $16,000 per-room value increase.

John W. O’Neill, MAI, CHE, Ph.D., is managing director of Hospitality Advisory Services, LLC, and associate professor in the School of Hospitality Management at The Pennsylvania State University. He can be reached at jwo3@psu.edu or 814-863-8984.