The U.S. lodging industry hit bottom sometime during late 2009 and early 2010 and has started to recover nicely. The recovery occurred about 10 to 12 months earlier than what many industry experts believed two years ago. Although unemployment still remains a nagging problem for millions of out-of-work Americans, the economic engine within the U.S. is rebounding as shown by the growth in gross domestic product. There has always been a very close correlation between GDP and hotel demand, so it’s not surprising U.S. hotel demand is now on the rise. This has equated to higher hotel occupancies—particularly since the growth of hotel supply has started to decline.

Let’s look at the data: At the end of 2009, HVS projected hotel demand would rise two percent in 2010 and three percent in 2011. Coupling supply growth of 1.5 percent in 2010 and 0.9 percent in 2011 produces a 0.5-percent gain in occupancy in 2010 and a 2.1-percent occupancy increase in 2011.

Our recently revised forecast shows hotel demand in 2010 going up 7.5 percent and 3.0 percent in 2011. Supply growth projections were changed to 2.0-percent growth in 2010 and 0.5 percent in 2011. This combines to produce an occupancy increase of 5.3 percent in 2010 and 2.5 percent in 2011. These differences certainly reflect an unexpected early recovery. We had projected average rate falling by about 1.5 percent in 2010 and increasing by 2.0 percent in 2011. We now expect just a 1.0-percent loss in 2010 and a 4.5-percent gain in 2011, producing RevPAR increases of 4.3 percent in 2010 and 7.1 percent in 2011.

While supply, demand, occupancy, rate and RevPAR data is interesting, we at HVS believe the ultimate hotel economic measure is value. RevPAR is merely a revenue number which does not account for operating expenses, debt service coverage, cost of capital or potential hotel buyer interest. These factors are inherent in an estimate of value. With our revised upward projection of RevPAR, coupled with the huge interest in hotel assets currently displayed by hotel buyers, our new estimates of hotel value growth shows a significant change from the original projections we made at the end of 2009. The table sets forth the value per room and the percent change of a typical U.S. hotel.

The data shows two cycles, starting in 2000 when hotel values peaked at $69,000 per room. With the events of 9/11 and a recession, hotel values declined 24.6 percent in 2001, leveled off in 2002, lost another 1.9 percent in 2003 and recovered strongly between 2004 and 2006. The economic collapse commenced in 2007, with hotel values declining nearly five percent. Another 14.6 percent was lost in 2008, and 2009 saw a huge decline of 31.3 percent. With the RevPAR recovery starting in 2010, combined with lower capitalization rates created by more buyers than sellers in the market, we project hotel values will increase more than 17 percent this year and 27 percent in both 2011 and 2012.

This strong level of hotel value recovery occurred 12 months earlier than what we expected at the end of 2009. The table also shows the huge swings in hotel value on both the downside and the upside. This is due to the impact of both operating and financial leverage on a hotel’s profitability. Since hotels have a large component of fixed cost that doesn’t vary with moves in occupancy or RevPAR, profitability increases rapidly once total revenue exceeds fixed expenses. Likewise, hotel profitability declines quickly when total revenue falls.

Supporting our view of the high interest from hotel buyers is the increase in major hotel sales. In 2009, HVS counted just 46 major hotel sales, which we define as single-asset transactions of more than $10 million. This was down from 121 major hotel sales in 2008 and a peak of 279 in 2005. As of the end of September of this year, there were 79 major hotel transactions compared to 36 for the same period during 2009. The average price per room for these 2010 sales was more than $174,000 per room compared to a peak of $203,000 per room in 2006.

All this data shows a recovery in hotel values commenced in late 2009 and continues in 2010. This will grow stronger over the next several years as GDP increases, hotel occupancies recover and room rates edge upwards. In previous Lodging Hospitality articles, we warned hotel investors not to attempt to time the market but to buy good quality hotels when they became available. Those who followed our advice probably got a real good deal during 2009. Those who didn’t will pay more in 2011 and beyond.

HVS just published its U.S. Hotel Valuation Index, which provides historic and projected hotel value trends for 52 markets and the U.S. We normally sell this research publication for $1,500, but for my Lodging Hospitality readers I will send you a free copy if you e-mail me at srushmore@hvs.com.

Stephen Rushmore is president and founder of HVS, a global hospitality consulting organization with offices around the world. Steve has provided consultation services for more than 12,000 hotels throughout the world during his 35-year career and specializes in complex issues involving hotel feasibility, valuations and financing. He can be reached at srushmore@hvs.com or 516 248-8828 ext. 204.