In a typical year, 400 to 500 hotels change hands in the U.S. This volume of transactions is significantly higher than any other region of the world. With the massive recession contributing to a huge erosion of operating profits, hotel owners are facing property value declines of 40 percent to 60 percent in many parts of the country. Coupled with an almost total lack of mortgage money to finance acquisitions, most owners are sitting on the sidelines waiting for a recovery to develop before putting their properties on the market.

The following table shows the number of U.S. hotel sales for the last 5 years:

U.S. Hotel Sales
2005 534
2006 494
2007 467
2008 268
2009 138
Source: HVS

The years 2005 and 2006 were peaks with 534 and 494 hotels traded. Transaction volume dropped slightly in 2007 with total sales amounting to 467. These peak years were characterized by readily available financing at high loan-to-value ratios and low interest rates, which sent buyers into a frenzy. It wasn’t unusual to have 15 to 20 buyers actively pursuing each listing. This strong acquisition interest sent values skyrocketing and capitalization rates plunging. It was a good time to be a seller and a broker.

Starting at the end of 2007 and into 2008, the availability to access mortgage debt became significantly more difficult. Residential debt, particularly the sub-prime variety, caused CMBS debt buyers to withdraw from the market, which started a ripple effect impacting all types of real estate financing. As you can see from the table, transactions in 2008 (268) dropped 50 percent from the 2005 level and in 2009 they had fallen to 138 (50 percent lower than 2008). Not a good time to be a hotel broker.

The following table of 2009 transactions illustrates some of the large decline in values:

 This table shows the estimated sales price per room for some of the transactions involving a variety of U.S. branded hotels. In most cases these prices were significantly lower than the property’s replacement cost and its 2007 market value.

Based on past recessions, hotel values seem to bottom out at between 30 percent and 40 percent of replacement cost. Certainly, a Crowne Plaza at $9,000/room, a Holiday Inn at $16,000/room, a Radisson at $36,000/room, a Sheraton at $40,000/room and a Marriott at $66,000/room are prices that must be close to the 30 percent to 40 percent of replacement cost threshold.

Buyers that can pick up properties at a fraction of their replacement cost benefit in two ways. First, they are acquiring a hotel at a very attractive price, but more importantly these highly discounted hotels are probably situated in very depressed markets without any new development planned until the overall market recovers. This barrier to entry reduces the risk of future overbuilding.

Most brokers are expecting to see an increase in transactions this year. While there hasn’t been a change in the availability of mortgage capital, private equity funds have raised billions of dollars and are ready to acquire assets at bargain prices once they come on the market. These funds will probably purchase hotels with just equity capital initially, and add financing in the future (2012 and 2013) when mortgage debt once again becomes available.

The combination of all this capital chasing a limited number of transactions combined with slowly improving occupancy (and hopefully rate) is good news for owners waiting to dispose of their hotels. As a result, HVS expects hotel prices to start escalating later this year, which means the absolute bottom of the market occurred during 2009 and the future is looking brighter, particularly for brokers.

If you would like the details of all the hotel transactions last year, drop me an e-mail 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.