Up the Value Roller Coaster

Hotel owners and investors are currently riding on the steep, upward-sloping part of a roller coaster ride, not exactly knowing how fast or frightening the next downward slope will be, yet not forgetting the last scary and sustained downward spiral from 2001 through 2003. The good news is that the current position of U.S. hotel values on the upward slope is unmistakable: In 2004, the average value increased 7.8 percent to $79,358 per guestroom, the largest annual value increase the industry has seen since the 1990s. With positive indicators such as a 3.7 percent gross domestic product (GDP) growth rate projected for 2005, the Penn State Index of Hotel Values projects an even greater value increase of 8.5 percent in 2005. Another 7.8 percent increase in hotel values is expected in 2006.

The other good news is that this year, the average hotel value should be at its highest point ever, surpassing the previous peak value seen five years ago, in 2000. But then again, averages don't explain all hotel types. Midscale hotels without food & beverage outlets, the current darlings of many hotel owners and investors, actually returned to their pre-2001 values last year, demonstrating the great popularity of this property type in the transaction marketplace. On the other hand, luxury hotels, (e.g., Four Seasons and Ritz Carlton), and upper upscale hotels, (e.g., Hyatt and Westin), are not expected to return to their 2000 value highs until 2006. All other hotel types, including upscale, midscale with food & beverage, and economy hotels, fall pretty close to the average and are projected to return to their record 2000 values this year.

The Penn State Index projects all hotel types should experience value increases this year, as they did last year. Despite the fact that luxury hotels are not expected to return to their 2000 values until 2006, they're currently experiencing the greatest annual dollar increases in value per room. These hotels are expected to increase in value by an average of over $17,000 per room this year.

At the other end of the hotel spectrum, while economy hotels naturally have the lowest values per room, they're expected to achieve the greatest percentage increases in value in 2005. These properties are expected to register a whopping 15.2 percent value increase this year.

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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