In today’s turbulent hotel market, one of the most challenging professions has to be appraising hotels. The combination of very few transactions, coupled with the lack of financing and uncertain future profit projections, makes it extremely difficult to develop an estimated value.

With that said, the need for well-founded appraisals becomes even more important during these challenging times because so many decisions must be made based on either current value or a value sometime in the future. Lenders need to know a hotel’s value to determine whether to foreclose or work out the problem loan. Owners need to know the current value and the potential future value to determine whether to keep paying debt service or to give the keys to the lender.

To assist hotel lenders and owners in valuing their assets, HVS developed the Hotel Valuation Index (HVI), which tracks hotel values in 66 U.S. hotel markets and the U.S. as a whole. The HVI goes back to 1986 and projects out to 2013 and provides for each market a total value per room, a percent change in value per room and a dollar change in value per room. Users of the HVI can see the actual historic change in value per room and projected change in value per room. This provides a very useful benchmark for making investment decisions.

Check out an abbreviated version of the table with 21 of the major U.S. hotel markets and the U.S. as a whole.

It shows the HVI for the years 2000 through 2013. Since 2000 was considered a peak year for hotel values followed by a decline starting in 2001 and a recovery ending in 2006-07, this historic information forms a basis for evaluating what actually happened in 2007 and 2008 and what is expected to happen from 2009 onward.

Looking at the U.S., in 2008, the value of a typical full-service hotel declined by roughly $14,000 per room, or approximately 14.6 percent. Per-room values for the U.S. as a whole reached their peak in 2006, surpassing $100,000. Since that time, per-room values have tumbled, and are forecast to reach half their peak amount in 2010.

These trends have been prompted by significant declines in all forms of travel, which have in turn severely impacted net income, as hoteliers drastically reduce rates in an effort to boost occupancy. Combined with stringent credit availability and terms, the effect on values is significant. While per-values will remain suppressed in the near term, the overall market should recover in 2013-14.

Looking at what will probably be considered the worst period—from 2006 to 2010—the hotel markets that fared the best and actually gained value were Washington (DC), Houston, San Francisco, Boston and Denver.  Focusing on the future, the hotel markets projected to recover the quickest and strongest are Washington (DC), Boston, Houston, San Diego and Seattle.

Of the various types of real estate, hotels tend to exhibit the highest value volatility. This means that a lot of money can be lost on the downside of a hotel value cycle, but at the same time a lot of money can be made throughout the recovery. Using the HVI to pinpoint market opportunities, investors should come out of this down cycle with some great hotel assets.

For a complimentary copy of the Hotel Valuation Index publication, which includes data on 66 hotel markets, send me an e-mail at srushmore@hvs.com.

Steve 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 516 248-8828 ext. 204.

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