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Price correction (part II)

While the U.S. lodging industry is projected to continue experiencing increases in performance metrics, the gap between increasing demand and growing supply is narrowing. Demand growth is decelerating and barring a black swan unforeseen event, fairly stable occupancy levels are anticipated, while increases in average room rates are expected to continue to facilitate a rising RevPAR, albeit at a moderate pace. During the first half of 2016, despite strong fundamentals, hotel investment has been subdued due to perceived concerns that a dramatic slowdown to an already tepid U.S. economic expansion is forthcoming in the near future. The market has talked itself down which has resulted in a widening of bid/ask spreads for desirable hotel investment opportunities. I believe that as time passes, when looking in the rear view mirror, last year’s peak pricing of U.S. hotel properties will become much clearer.

Since I wrote Price correction (part I) several months ago, I have been privy to information regarding select transactions that provide empirical evidence of price erosion of various U.S. hotel assets. For no reason other than negative market perception, I have seen contract prices reduced between five and twenty percent. A recent US$100-plus million hotel sale is noteworthy in that one year ago the seller rejected a bona fide offer of 15% more than the amount of the current sale price. In addition to the seller, the institutional broker, who on both occasions marketed the property for sale, confirmed that although during the last twelve months, the subject property and its sub-market’s performance metrics have improved, today’s lower closing price was due merely to an impression by investors of a market value correction.

Although several recent U.S. hotel trades indicate value erosion during the past six to twelve months, it is important to note that there is insufficient evidence to support a broad, national market price correction. While some assets may currently be experiencing negative pricing pressure, not all hotels and/or markets have been subject to such a phenomenon. Lodging is a neighborhood business and underlying fundamentals can vary widely amongst submarkets. Values of irreplaceable hotels in high barrier to entry 24/7 and/or resort markets remain robust. Record-setting prices paid for U.S. hotels thus far this year include: the US$945,000 per room trade of the Mandarin Oriental Boston, the US$695,000 per unit sale of the Hotel 1000 Seattle, and the $1.3 million per room acquisition of the Capella Washington, D.C.

Although on average U.S. hotel prices are expected to remain stable for the balance of the year, broad market trends cannot be directly applied to an individual asset.  Numerous factors influence the value of a specific hotel asset including a property’s age, condition, location, amenities, reputation, and replicability. While during the near term some hotel assets and/or submarkets may experience declining property values, others will continue to endure rising prices.

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