It appears the U.S. hotel industry has finally reached the bottom point of this cycle and is starting to show signs of recovery. By all forms of measure, this cycle has been far worse than anyone has experienced since the Great Depression. U.S. hotel demand plunged eight percentage points during 2008 and 2009. This produced a 14-percent reduction in occupancy. Coupled with a $9.40 drop in average rate during 2009, RevPAR declined $11.79, or 18 percent. While the recession of the early 1980s produced a drop in national occupancy of 17 percent, between 1979 and 1986, the average rate during this period increased 62 percent, producing a positive RevPAR growth of 34 percent.

Looking ahead to 2010, most analysts are predicting a flat year for RevPAR growth with occupancies rising and room rates either declining slightly or rising modestly.

While most consulting firms focus on RevPAR results, HVS believes value trends are significantly more meaningful to hotel owners, operators and lenders. Through its Hotel Valuation Index (HVI), HVS monitors value changes in 65 individual U.S. markets and the U.S. as a whole. The HVI looks at supply, demand, occupancy and rate trends for each market area and creates an income and expense projection based on local operating costs. It then capitalizes the resulting net income by an appropriate capitalization rate, which produces an estimate of value for a typical hotel in that market. The HVI tracks historic hotel values back to 1987 and projects them out to 2015. This tool shows the high and low points of each cycle, the velocity of the declines and recovery and the overall value volatility of each market.

The following table shows the HVI for a typical hotel in the U.S. It contains the value per room, the percent change and the value change on a per-room basis.

During the early ’90s, values declined approximately 30 percent as a result of a national recession and severe overbuilding during the ’80s. Values started to recover in 1992, but the velocity of growth was a relatively weak 10 percent to 12 percent due to excess supply being absorbed, which restrained the value growth.

The next time value declined was between 2001 and 2003 when hotel values dropped approximately 26 percent due to the terrorist attacks of 9/11 and the recession. The recovery following this downturn was more robust with values increasing 22 percent to 27 percent between 2004 and 2006. The strong economy, the lack of overbuilding and the readily available financing fueled this growth period when values almost doubled.

The current downturn commenced at the end of 2007 with the collapse of the real estate lending market. The resulting recession fuelled the decline and values fell almost 15 percent in 2008 and over 31 percent in 2009. While this drop was severe, it could have been far worse if this downturn was preceded by the same amount of overbuilding that occurred prior to the 1991 recession. Fortunately, the CMBS lending vehicle that created the collapse of the real estate lending market worked well for existing hotels with established cash flow, but was not appropriate for proposed lodging facilities that produced no cash flow during construction.

With the potential growth of RevPAR, the huge amount of acquisition capital waiting for hotels to come to market and the pent-up desire for sellers to put their properties on the market, we predict the decline in U.S. hotel values will bottom out this year and stage a strong 21-percent recovery in 2011. A year ago, we were forecasting a nine-percent decline in hotel values during 2010, followed by a 14-percent increase in 2011.

Hampering the recovery somewhat is the current lack of financing. Most hotel buyers are buying “all cash” and hoping to obtain debt financing at some point in the future. Some mortgage brokers have financing sources that are offering 50 percent to 60 percent loan-value loans at interest rates of eight percent to 10 percent, but often personal guarantees are required. We are predicting a sustained recovery with annual hotel value growth rates of over 20 percent from 2011 through 2013, with stabilization occurring during 2014 and 2015.

What makes this recovery more predictable and robust is the fact that without financing, it is unlikely that many proposed hotels will actually be constructed, which effectively eliminates the threat of overbuilding in most markets for the next three to five years.

Based on the HVI, values peaked in 2006 at $100,000 per room. The low point occurred in 2009 with values dropping to $56,000 per room. By 2013, hotel values will recover to 2006 levels and continue to increase from there. This data illustrates how buyers need to stop waiting and start buying immediately and how this strategy will pay off with significant value growth over the coming years.

I will be presenting my value trends at the NYU Hotel Investment Conference in June. If you would like a copy of my presentation, please send 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.