NEW YORK—Hotel values will surpass the previous peak this year and will continue to appreciate through 2016 before stabilizing, according to the HVS-STR Hotel Valuation Index released last week at the inaugural U.S. Hotel Market Connections event. Stephen Rushmore, Jr., president and CEO of HVS, presented the index from New York via webcast to more than 750 attendees at 12 venues around the U.S. Following his remarks, presentations and panels at each site discussed local trends and forecasts.
“We’ve never seen so many years, or projected so many years of value growth for a typical hotel,” Rushmore said. “Following a strong dip in 2009, hotel values have rebounded sharply in the past three years, with both 2011 and last year recording increases of 20%.”
In 2012, 60 of the 65 markets HVS studies saw gains in value, led by Cleveland with a 60% boost in values. Other cities with especially large gains were Tampa, Florida (+58%); Indianapolis (+50%); Oakland, California (+49%); New Orleans; and Norfolk, Virginia, both with value gains of 43%.
Only a few markets declined last year. Cities with double-digit declines included Washington, DC (-10%), Huntsville, Alabama (-12%) and Albuquerque, New Mexico (-18%).
Rushmore said he anticipates a slowing in value growth during the next several years because of several market factors.
“For one, the cost of capital probably won’t get any cheaper, and the (net operating income) recovery, while it’s still underway, will slowly start to taper off, thus tapering down values and stabilizing them around 2016,” he said.
The HVS forecast calls for a nationwide increase in values of 12% this year, with three markets in Florida—Tampa (+31%), West Palm Beach-Boca Raton (+31%) and Miami (+29%)—leading the country. At the other end of the spectrum, values in Tucson, Arizona, are forecast to fall 22%.”
“That shouldn’t be too much of a surprise since rates are quite depressed (in Tucson) and there are issues with airlift capacity,” Rushmore said.
Through 2016, HVS forecasts a 40% rise in hotel values nationwide. Again, Florida will lead the way, with five markets among the 10 cities expected to see the greatest increases in value.
“We’re not anticipating any markets declining in value over the next four years, which is a very encouraging sign, but there are a handful of markets that will appreciate at less than (the rate of) inflation,” he said. That group includes several major markets: Denver, Los Angeles, Boston and Washington, DC.
Rushmore identified several markets where it might be better to sell hotels now rather than later, and several where it might be best to wait a year. The calculation is made by “looking at which markets still have value appreciation left and which don’t,” he said.
Boston and Washington are forecast to see limited appreciation in the next four years, so now is the best time to sell in those markets, Rushmore said.
Five other markets—New Orleans, Atlanta, Chicago, Philadelphia and Cleveland—should see some short-term value appreciation and then plateau from there.
“Next year would probably be a better time to sell in those cities,” he said.
According to HVS, the volume of major hotel transactions—defined as sales of hotels of $10 million or greater—was similar in 2011 and in 2012, and Rushmore said he expects this year to be “somewhat consistent with the previous two years.”
Rushmore gave his predictions for the hotel investment environment for the next couple of years:
- increased levels of transactions and refinancing in 2013;
- a stronger and more competitive commercial mortgage-backed securities market;
- scarcity of financing for new construction through at least 2014;
- stable capitalization rates for the remainder of the year; and
- extended periods of increased values through 2016, especially in secondary markets.