Double-Digit Growth

In the late 1960s, my parents took my siblings and me on a trip from our upstate New York home to New York City to go to the top of the tallest building in the world, the Empire State Building. As we drove through Westchester County in our ‘67 Olds Cutlass, I remember a couple of things. First, I remember my father complaining about the high cost of the tolls on the New York State Thruway (though he also mentioned that by the 1970s, the Thruway would be paid off, and the road would be free — which, by the way, still hasn't happened). Second, I remember my mother saying that people in Westchester could probably afford the high tolls because, as she pointed to some mansions on a hill near the Thruway, some of the houses there were selling for over $100,000. I recall both believing that the Thruway would someday be free and that real estate seemed very expensive.

The point, aside from the fact that real estate is an awesome long-term investment, is that while it may not seem like very long ago when $100,000 purchased a mansion, the Penn State Index of Hotel Values is now projecting that the average U.S. hotel will be worth more than $100,000 per room by 2008. I've gotten used to seeing high-priced luxury and upper upscale hotel sales transactions in major metropolitan markets like ones already recorded this year, such as the Century Plaza Hotel in Los Angeles selling for $400,000 per room, the Times Square Hilton in New York going for $565,000 per room, and the Four Seasons in Washington, DC, for $800,000 per room, but I'm still taken aback when I see Hampton Inns sell for more than $100,000 per room.

Now, more about the Penn State Index of Hotel Values. Using its econometric modeling, the Penn State Index projects that 2006 will be the second consecutive year of double-digit percentage growth in U.S. hotel values. This growth follows moderate increases in 2004, which were preceded by three consecutive years of hotel value declines from 2001 through 2003.

In short, the Penn State Index projects that overall hotel values are expected to increase by 10.3 percent this year. All hotel types are expected to achieve value increases in 2006. Luxury hotels are expected to register the largest dollar increases in value, increasing by approximately $27,000 per guestroom, while economy hotels are expected to experience the largest percentage increases in value this year with a 16.7 percent increase. Even midscale hotels with food and beverage, which were recently surpassed in value per room by the typically more contemporary midscale hotels without food and beverage, are expected to register their second consecutive year of double-digit value growth.

I no longer believe the New York State Thruway will someday be free, but I still believe real estate seems very expensive.


John W. O'Neill, MAI, CHE, Ph.D., is a professor in the School of Hospitality Management at The Pennsylvania State University and a licensed real estate appraiser. He previously held unit-level, regional-level, and corporate-level management positions with Hyatt and Marriott. He can be reached at jwo3@psu.edu or 814-863-8984.

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