When it comes to value, the reports are equally make believe. One of the major appraisal firms produces value data. They predicted a few years ago that by now values would materially exceed 2007. As usual with most of their predictions, they were completely wrong. Problem is none of it is actual numbers. They make up assumed hotels in 25 markets with their own numbers and then they use their own, and not real cap rates, and then they claim values are up so their appraisals do not look as far off reality as they are. But hotel values are already down over 10%, and one top analyst thinks it might be down as much as 15%. A top level banker told me every hotel deal coming to him for funding is being re-traded down by the buyers before close. A PE fund source tells me there are currently almost no hotel deals that make economic sense for a PE buyer. The top was mid-2015, but the hotel appraisers and pundits don't want to admit it because it would counter what they have been saying at conferences and in print. While there is not a crash, a decline is underway. Recent reports passed on to me from closed meetings with REITs and brands confirm this.

The hotel industry has always looked at the future with rosy glasses, and as late as the June 2008 investment conference they were predicting the worst was over and it was time to be a buyer. Reality is not something the industry excels at recognizing.

While there are hotel owners who feel good now, they are feeling better relative to 2009, but if they were to look at where they are inflation-adjusted compared to 2007 and compared to other types of CRE, they would understand that while some who bought in 2009-2013 made a lot of profit on a flip, those who just held on through the cycle are back where they started, and are now headed back down.

The point of all this is that you need to understand what is really happening in the hotel industry, and you need to understand that data is put out and projections made of only RevPAR to hide the reality of what is happening. Make believe values are reported using make believe data. If you are contemplating a hotel investment, there are still deals to do, but make sure to do your own due diligence, and dig down and do not get an appraisal until required to do so for the loan, but ignore what it says, do not depend on published data unless you can get real NOI data, do not pay attention to reports of record demand or RevPAR, and do not go with what you hear at conferences as many have an agenda to only sound positive.

I spent several decades in the hotel industry, and I created the first hotel CMBS program in 1993, so I have a deep knowledge base. Now I am doing other things in semi retirement, and can say what is really going on under the blanket without caring about who may get upset. Most of what I say here is fully corroborated by senior people in the industry who talk to me off the record.

Despite what the hotel industry appraisers, pundits and data sources put forward, the reality is that the slowdown is underway. We continue to hear RevPAR is up, demand is at record levels, etc., meanwhile occupancy is down for the year, and will continue down. ADR is up a little, but it is unclear by how much for same store sales since the data includes new hotels going into service. Of course the ADR ramp up looks good for those properties. It is also very market by market. New York is suffering, as are other urban markets where too much was built and where foreign tourists have diminished materially. It is apparent just walking around Manhattan this summer that the number of foreign tourists is nowhere near the last few years.

Several things weigh on hotel values today. Corporate earnings are down seven quarters in a row. The first thing cut is travel. The EU and UK are now finding it too expensive to travel here to vacation, shop, or, in some cases, to do business that can be done by phone or email. China is sinking further into problems and is unlikely to regain the flow of Chinese tourists that the hotel industry expected. Group business will start to decline as companies send less people to conferences and trade shows. As there is zero return on many retirement savings, and as things remain very uncertain, baby boomers, who are mostly on tight budgets, are not going to take as many vacations as forecast. The main demand drivers all have issues. Data providers say demand is at a record, as is occupancy. Yes, but that is simply because they do not adjust for population growth, so of course there are more people traveling. Since 2007 the population and increased tourist visits are up over 30 million. With muted new builds over the past seven years, of course demand is up along with occupancy. But now the new construction is coming on line, and a huge new player has upset the data. Airbnb is a major factor in several urban and resort markets.

The industry tries to make believe Airbnb is not an issue, but that is a lie. On citywide sell out nights it is a big restraint on ADR. When the Pope was in New York there were 20,000 Airbnb rooms sold and there were empty rooms in some hotels. The industry turns out make believe research trying to debunk Airbnb, and the brands and data people refuse to even count those accommodations in supply growth. As a result, the supply data from the hotel industry sources is misleading and inaccurate by several hundred thousand room nights available. See no evil, hear no evil. The supply data for many markets is make believe to hide the impact of Airbnb. It is like RevPAR. The data people only report Revpar and never NOI, because they do not want you to know what is really happening.

When it comes to value, the reports are equally make believe. One of the major appraisal firms produces value data. They predicted a few years ago that by now values would materially exceed 2007. As usual with most of their predictions, they were completely wrong. Problem is none of it is actual numbers. They make up assumed hotels in 25 markets with their own numbers and then they use their own, and not real cap rates, and then they claim values are up so their appraisals do not look as far off reality as they are. But hotel values are already down over 10%, and one top analyst thinks it might be down as much as 15%. A top level banker told me every hotel deal coming to him for funding is being re-traded down by the buyers before close. A PE fund source tells me there are currently almost no hotel deals that make economic sense for a PE buyer. The top was mid-2015, but the hotel appraisers and pundits don't want to admit it because it would counter what they have been saying at conferences and in print. While there is not a crash, a decline is underway. Recent reports passed on to me from closed meetings with REITs and brands confirm this.

The hotel industry has always looked at the future with rosy glasses, and as late as the June 2008 investment conference they were predicting the worst was over and it was time to be a buyer. Reality is not something the industry excels at recognizing.

While there are hotel owners who feel good now, they are feeling better relative to 2009, but if they were to look at where they are inflation-adjusted compared to 2007 and compared to other types of CRE, they would understand that while some who bought in 2009-2013 made a lot of profit on a flip, those who just held on through the cycle are back where they started, and are now headed back down.

The point of all this is that you need to understand what is really happening in the hotel industry, and you need to understand that data is put out and projections made of only RevPAR to hide the reality of what is happening. Make believe values are reported using make believe data. If you are contemplating a hotel investment, there are still deals to do, but make sure to do your own due diligence, and dig down and do not get an appraisal until required to do so for the loan, but ignore what it says, do not depend on published data unless you can get real NOI data, do not pay attention to reports of record demand or RevPAR, and do not go with what you hear at conferences as many have an agenda to only sound positive.

I spent several decades in the hotel industry, and I created the first hotel CMBS program in 1993, so I have a deep knowledge base. Now I am doing other things in semi retirement, and can say what is really going on under the blanket without caring about who may get upset. Most of what I say here is fully corroborated by senior people in the industry who talk to me off the record.