Silver Lining in Q2's Dark Cloud

One year has passed since the beginning of an economic downturn that many thought would be over by now. Recent US Federal Reserve actions and continued negative news flow–about financial institutions around the globe–indicate that tight credit conditions and an illiquid market will persist into 2009. It is yet to be determined how deeply the rest of the world will be impacted by the slowing US economy. The good news is that bad news cannot last forever and an upturn is inevitable, it is just a matter of when.

Generally speaking, in spite of capital market constraints, operating fundamentals of commercial real estate in the US remain fairly strong. While experiencing a 2.5% decline in occupancy during the first half of 2008, the US hotel market has simultaneously achieved a 4.2% increase in average rate, resulting in relatively modest growth of 1.5% in Revenue Per Available Room (REVPAR). Not bad given all the doom and gloom one hears and reads about these days. It is important to remember that for the U.S. hotel industry, any near term negative economic effects that may occur, will transpire against a backdrop of the record U.S. hotel revenues and record profits that occurred during 2007.

The CB Richard Ellis Valuation & Advisory Services Hospitality & Gaming Group continuously monitors the major US hotel sale transaction market. CBRE’s quarterly Major US Hotel Sales survey reports single asset sale transactions above $10 million that are not part of a portfolio allocation.Interesting observations from my Q2 (Mid Year) 2008 survey compared to the first half of 2007 include:

• 40 US hotel trades of $10 million or more occurred during the first half of 2008 compared with 52 during the same time in 2007. Capital market constraints are the clear cause of this approximate 25% decline in significant US hotel transactions;
• The average size hotel that traded in the Q2 2008 survey was roughly 240 rooms, with an average transaction price of approximately $44 million and an average price per room of nearly $185,000. In comparison, the average size hotel sale in the Q2 2007 survey was roughly 370 rooms, with an average transaction price of approximately $100 million and an average price per room of almost $265,000. Capital market restrictions have changed the complexion of US hotel asset sales. Relatively small hotel deals are getting completed, while the industry’s ability to structure larger institutional grade hotel sale transactions has been limited. Further evidence of the change in the US hotel sale transaction market is illustrated by the following: