Through the first three quarters of 2007, the US lodging industry has experienced an unprecedented level of merger and acquisition activity. Healthy industry operating metrics, along with an abundance of institutional and private debt and equity capital, has resulted in a significant number of corporate entity and property level deals. The recent closing of the record setting $26-billion acquisition of Hilton Hotels Corp. by the Blackstone Group is a tremendous vote of confidence and implies a long-term positive outlook for the sector. The deal, which was announced in early July 2007 just prior to the credit crunch, was financed by a consortium of some of the biggest names on Wall Street including: Bear Stearns, Bank of America, Deutsche Bank, Goldman Sachs, Lehman Brothers, Merrill Lynch and Morgan Stanley. Many believe the closing of this blockbuster transaction at the end of October 2007 during a tightened credit market could inspire confidence in other private companies executing similar buy-outs.

The CB Richard Ellis Valuation & Advisory Services Hospitality & Gaming Group continuously monitors the major US hotel sales transaction market (above $10 million single asset, not part of a portfolio allocation). Interesting observations relative to the more than 80 trades that occurred as tracked by the YTD Q3 2007 Major US Hotel Sales survey include:

• Hotel investments in and surrounding major 24/7 markets along both US coasts continue to be highly sought after.
• Due in part to high land and construction costs, which create high barriers to entry for new hotel product, many trades of US hotels continue to occur at levels below replacement cost.
• 17(more than 20%) of the major single asset US hotel sale transactions of $10 million or more traded in excess of $100 million each.
• Sophisticated hotel investors continue to price assets on a discounted cash flow analyses that factors in perceived upside potential rather than applying stabilized capitalization rates to "in place" cash flow.

The outlook for the US lodging industry remains positive, with profits anticipated to continue growing to record levels. While the current credit crunch has caused a temporary slowdown in sales and financing transaction activity, the economic fundamentals of the hotel sector remain strong. History has proven many times that markets overreact at times resulting in panic at one end of the spectrum, and irrational exuberance at the opposite end. Smart money recognizes that the world is currently experiencing an adjustment that was due, but that an overcorrection is most likely occurring. Long term, the US will benefit from the world's emerging markets need of American goods, services, and technology. Furthermore, new middle classes that are dramatically rising in many parts of the world including India and China, will soon in droves begin to visit and stay in US hotels. Additionally, US hotel property prices are relatively inexpensive when compared with other markets around the world, and international investors continue to perceive the US as a safe haven to deploy capital. Knowledgeable and sophisticated US hotel investors who buy for a long-term hold believe that pricing for US hotel assets will continue to rise, albeit at a slower rate than the recent past.

Daniel Lesser is senior managing director-industry leader, valuation & advisory services-hospitality & gaming group of CB Richard Ellis in New York City. The views expressed in this article are the author's own.