Luxury hotel market values are forecast to be especially hard hit in the next year. The gloomy consumer sentiment at the top end of the luxury-goods retail market that has resulted in operators like Saks, Nieman Marcus, Nordstrom and Tiffany all issuing softer earnings projections for the year, is expected to similarly affect luxury hotel demand. This hotel category includes such eminent lodging brands as Four Seasons and Ritz-Carlton. Combined with the effect of less financing being available for big hotel acquisitions, luxury hotels — which had the highest dollar increase in value per room in 2007 at an increase of $24,468 — are forecast to absorb the highest decrease in value per room this year, to the tune of a $13,425 drop in value per room. Upper upscale hotels, including such brands as Hyatt and Westin, are expected to experience a similar pattern of value declines as luxury hotels, but with less extreme value loss on a dollar-per-room basis.

Though the overall hotel market is not expected to be hit quite as hard as the luxury end, overall market values are expected to decline in 2008 and 2009, though as of right now, all indicators are that the value declines in 2009 are expected to be relatively modest compared to 2008. This decline comes after market values increased four years in a row from 2004 through 2007. The current down-cycle in values is not expected to be as long as the previous up-cycle, nor as prolonged as the previous down-cycle, which ran for three years from 2001 through 2003.

What do these trends mean for the hotel sales transaction market? First, owners who don't have to sell, won't sell because they believe they can wait a couple years until values increase again. Second, some owners who had considered selling may not do so because the economics of their deals have changed for the worse. Third, limited availability of financing due to financial market turmoil will mean lower hotel sales transaction volume, as well as lower prices.

Could things get worse than the current forecast? The Penn State Index of U.S. Hotel Values is based on current prognostications that hotel average daily room rates will continue to rise through 2009. But, if the effects of fewer air flights, higher gasoline prices, rising unemployment, and depressed consumer confidence on average daily rates are greater than the prognosticators currently anticipate, then hotel values will be worse than the Penn State Index currently projects. There has always been a significant link between average daily rates and hotel market values.

An upside of the turmoil in the financial markets, albeit a small one, is that fewer new hotels will be coming online than had been previously anticipated. This positive factor will have the effect of limiting downward pressure on the values of existing hotels, particularly fullservice urban and resort properties in markets with high barriers to entry.

The midscale hotels without food & beverage outlets hotel category (including such brands as Hampton Inn and Fairfield Inn) — the hotel type that had the greatest percentage increase in market value last year — is experiencing the smallest percentage decrease in value this year. Further, this hotel type is the only one expected to record any significant value increases in 2009, although the expected 1.7-percent increase in 2009 value will be well below the prevailing rate of inflation during the same period, so it's nothing get too excited about.

Upscale hotels — which registered strong value increases in 2007 — are posting a relatively high percentage decline in value this year, at 5.0 percent. This category includes such brands as Courtyard and Hilton Garden Inn.

The values of midscale hotel with food & beverage are continuing to trail further behind their counterparts without f&b this year and next. This category includes such tenured brands as Holiday Inn and Ramada Inn.

Economy properties, including Super 8 and Motel 6, are registering a 7.9-percent decline in market value in 2008. This drop represents the highest value loss of any hotel type on a percentage basis for 2008.

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.