Hotels are becoming an increasingly attractive asset class for institutional investors. The number of hotel assets in the NCREIF Property Index (NPI) has been steadily increasing from six in 1982 to seventy in the second quarter of 2010. However, the hotel sector is still substantially under weighted in the NPI index with only $4.6 billion, or 1.9% in market value as of September 30, 2010.
Hotel values are more volatile than many other property types because of the short-term nature of the leases (rooms). Occupancies and average daily rates can change quickly and are closely tied to gross domestic product and the overall economy. Although there has been a rebound off the lows of the recession there are obstacles and a headwind.
Since September of 2009 the number of distressed commercial properties has risen 48% and the number of commercial foreclosures has increased 33% according to CoStar. Of the $62 billion in delinquent commercial mortgage backed securities approximately $9.4 billion are hotel securities according to Realpoint, a ratings firm.
Does it feel like we’re only fifteen percent below the 2007 peak? The Green Street commercial property index (CPPI) shows values are up 35 percent since the bottom in May 2009 and are now fifteen to twenty percent below the last peak in pricing. However, this index is weighted toward high end or trophy properties that are part of forty seven real estate investment trusts. In contrast, the Moody index shows the market fell 42.1 percent from the 2007 peak and has since recovered only 5.5 percent. The Moody index uses repeat sales of commercial properties that have sold for more than two and a half million dollars. If you’re a typical hotel owner I’m sure you feel like you’re part of the Moody index.
Higher gasoline prices due to unrest in the Middle East threatens to shake the already challenged confidence of the consumer. Not-so-confident consumers don’t travel and that puts a damper on hotel occupancies. The facts that unemployment is still high and a high percentage of home mortgages are under water don’t help either.
At the 23rd annual Hunter Hotel Investment Conference recently they expressed slight concerns that not everything is rosy. Jan Freitag, VP of global business development for STR said: Given the strong demand growth (8% room demand growth in 2010), you would expect some life on the rate side but it hasn’t happened yet. Occupancy remains below 60% (58.7% in 2010) and developers consider 60% to be the magic number. Revenue per available room is down 13.8% from 2007. Average daily rate increases are lower than inflation, and every recession results in steeper rate discounts.
Going-in capitalization rates for first-tier (newer construction in prime to good) locations in the South Region range from 6-12% and average 9.1% estimates Real Estate Research Corporation. Second-tier properties (aging, former first-tier properties, in good to average locations) show a range of cap rates from 7-13% in the South Region with an average going-in cap rate of 9.8%. Third-tier hotels in the South Region (older properties with functional inadequacies and/or marginal locations) show a range of going-in capitalization rates of 7-14% with an average of 10.5%.
During 2010 real estate financing improved during the year and capital markets recovered. Fundamentals are generally stabilizing. Property values are stabilizing, and lender confidence improved during 2010. Credit spreads declined throughout the year, capital sources increased, and historically low interest rates continue.
The outlook for 2011 includes continued GDP growth, lower unemployment, and low interest rates. On the negative side we are starting the year with a high unemployment rate, home prices are still much lower than the peak, with a large percentage of mortgages under water, public debt levels are high and that risks higher interest rates.
Maybe your assessors have been proactive in reducing your tax assessment over the past year or two. Is your assessment still too high? Tax rates are likely to rise if values don’t leap up off of the floor soon. Don’t be caught paying a higher tax bill on a lower assessment. You be proactive and appeal your property tax assessment. This can be done every year in Georgia and most other states.
Get professional assistance with hotel property tax appeals. You can also find information on Georgia residential property tax appeals and order professional appeal services.
