A hotel appraisal presents an estimate of the market value of a hotel, which simply put, is the likely price the hotel would be expected to sell for on the open market under normal conditions. Since a hotel appraisal concludes with a hotel’s market value, it should include a market study for the hotel. A market study should be presented because an appraisal should reflect the due diligence conducted by a typical hotel purchaser, and a typical hotel purchaser conducts a market study.

A hotel market study presents a summary of the supply of and demand for hotel rooms in a competitive hotel market. In doing so, it quantifies the future supply of competitive hotel rooms and estimates the extent to which the market and subject hotel can capture the demand for those rooms in the future.

SEE RELATED STORY: The Truth Behind Hotel Feasibility Studies

It’s not easy to gather the data necessary to conduct a proper hotel market study. It requires that the analyst visit competitive hotels, speak with management and obtain information that’s not publicly available. The analyst also needs to meet with local government officials to develop an understanding of current and future trends in lodging demand generators. Usually, the appraiser must also speak with representatives of the lodging demand generators to find out where their guests are staying, why, how often, seasonality of demand, and what they’re paying.

This fieldwork is vital because it forms the basis of the analyst’s projections of lodging supply and demand and, ultimately, occupancy projections for the subject hotel. A hotel’s occupancy projections are the foundation of its overall financial projections, which form the basis of an estimate of the market value of a hotel via the income capitalization approach. The income capitalization approach is the primary method used to estimate the value of hotels because it most accurately reflects the analyses of most hotel investors.

A great number of people who appraise hotels don’t conduct proper market studies. Reasons for inadequately doing so include lack of training and lack of time, but there are no good reasons for a hotel appraisal not to have a real market study. When I review hotel appraisals for banks and for court cases, I actually find that roughly half of them don’t include a market study. Some of those appraisals have been conducted by professionals who have been in the appraisal field for many years.

Such appraisals not only don’t reflect the analyses of hotel purchasers, but they include insufficient support for their value conclusions. When I report back to the bank or judge regarding what I’ve found, it’s generally easy to say an appraisal is unacceptable or insufficient because it doesn’t include a market study.

There are many ways to evaluate whether an appraiser is qualified to appraise a hotel. Among them are the appraiser’s education, training and employment experience. General appraisal training is not enough. Hotel specific training is vital, and it needs to be much more than merely a couple courses.

Though there exists a good benchmark for certifying general appraisers, namely the MAI professional designation, i.e., Designated Member of the Appraisal Institute, there exists no such certification for hotel appraisers. Though most qualified hotel appraisers are MAIs, most MAIs are not qualified hotel appraisers. Before engaging anyone to appraise a hotel, I recommend obtaining a sample of their work and making sure it includes a proper market study.

VALUES TO RISE
Despite the current shakiness of the economy, overall hotel market values are expected to increase 12.2% this year and 12.4% next. These improvements are expected largely because of the overall improvements in hotel performance, and because investment parameters like interest rates remain favorable. The economy segment is projected to record the strongest percentage increases in hotel values in 2011 and 2012 of 16.4% and 15.0%, respectively. The luxury segment is anticipated to show the highest increases in value per room of approximately $26,500 and $35,300 in 2011 and 2012.

John W. O’Neill, MAI, ISHC, Ph.D., is director of the School of Hospitality Management at The Pennsylvania State University. He can be reached at jwo3@psu.edu or 814-863-8984.