The economic recovery will come, but it will be a little bit uneven, particularly at first. While I continue to believe that overall hotel values will bottom out in 2010, it really depends on the type of hotel. Luxury, upper upscale, upscale, and midscale hotels with food and beverage are expected to continue to experience value declines in 2010, while midscale hotels without food and beverage and economy hotels are expected to begin to show value rebounds in 2010.

With the combined effects of a decrease in demand and lower prices for all types of high-end goods and services, luxury hotels are expected to have the largest dollar decline in value in 2009—down about $72,000 per guestroom drop $252,209, followed by an additional $4,000 drop to $247,854 in 2010. With systemic problems at chains such as Red Roof Inns, economy hotels are anticipated to have the greatest percentage decrease in value this year, with a 25.6-percent drop to an average value below $20,000 per room, But then those properties are expected to post an average 1.7-percent increase in value next year.

At this point, the projections in the Penn State Index of U.S. Hotel Values assume there won't be any horrible and unanticipated economic event(s) which could cause a double-dip recession. On the other hand, I expect the federal government stimulus will gain traction causing the economy to grow, i.e., gross domestic product should once again increase and the recession should be over by early next year. Growth in lodging demand next year should be modest, though, as businesses and consumers are expected to continue to be cautious with their spending. More robust growth in demand and values is likely in 2011.

Economic recoveries take off more quickly in some markets than others. Even within the first markets to show a turnaround, some hotels will continue to experience limited value increases in 2011, particularly those with obsolescence such as:

• First-generation, exterior-corridor, economy properties with small guestrooms, and older, urban, tourist class hotels with small guestrooms,

• Wood-frame buildings with frail structure and poor sound insulation, particularly those lacking lightweight concrete or similar good quality floor coatings,

• Hotels in locations that have been out-positioned by newer growth areas with superior support amenities, such as contemporary restaurants and retail centers; and

• Properties without brand that provide global distribution systems and guest loyalty programs, or the inability to garner such an affiliation. 

Although it’s difficult to precisely project what a recovery will look like before an economy has reached its trough, I've done my best to encapsulate what I believe is most likely to happen with hotel values. At least at this stage, it's safe to say that there seem to be fewer and fewer negative economic signs all the time.

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.