Since the economic downturn, there’s no doubt that hotel values have dropped, and in some cases, plummeted in the past year. Valuation experts have seen wild and drastic movements in valuation affecting the sale of lodging properties across the country.
Suzanne Mellen, managing director, HVS San Francisco and Las Vegas, said the market for unencumbered properties has been revived. “Properties unencumbered by a brand have come back stronger. They have lots of potential buyers. Unencumbered is a bit more of a handicap because both owners don’t come in what they want without the access of management or the brand,” she said.
Mellen said that currently brokers’ opinion of value of hotels mean what they would sell the hotels for, say, in a couple of months. She said, “They’re saying 10 cap rates on current earnings; but current earnings have gone down by 50 percent which is very common now. So applying that to cap rate, you see values drop from 50 to 70 percent, like values right now are $.30 to the dollar what it was two years ago. This is the challenge once again. If you don’t have to sell today, why would you?” She underscored that market value is willing buyer and willing seller.
Sellers are not willing to sell right now. In an ideal market, seller wants to sell and buyers wants to buy. “Today transactions should be all cash. If they don’t have the cash flow, we do model financing with low leverage,” Mellen said, adding that today there are very onerous turns they are seeing out there.
Transaction volumes are very challenged. Real capitalization rate analytics have not updated their studies when the first quarter transactions came back were coming down at 50 percent. Sales comparison approach in an appraisal has less credibility today. Would-be hotel owners look today to income potential depending on the market and property type of hotels in this recessionary environment.
Growth expectations are barriers to entry. “If there’s a good brand or a stable diverse economic environment, cap rates are far less impacted because people would like to be in a more stable environment,” said Bryan Younge, director Capital Markets Group, Cushman & Wakefield.
“What we call a snapshot valuation works for us. It takes format into valuation – income capitalization, revenue multiplier, replacement cost and comparable sales. With income capitalization and revenue multiplier, we apply a base rate which we move with the economy (the base rate is different for different chains),” said Dan Beider, senior managing director, Paramount Lodging Advisors. They start applying premiums to discounts based on brand, market, quality of asset and physical standpoints. Values are derived and pegged alongside replacement costs and comp sales. They blend the four values depending on the type of asset and market putting weight (to get weighted average) on comparable sales depending on how good the statistics are.
“We put little weight on a very poor comparable sales to come up with a good overall average,” said Beider adding, they are seeing increased activities today on limited service hotels that are under contract or about to close.
Beider said the pool of buyers for limited service in the last few months is huge. While there were the traditional buyers who would buy huge assets in tertiary and secondary markets, Beider is seeing large group of buyers also looking at those types of assets, esp when the structure is in place. The buyer pool for these assets right now is bigger than in the next six to twelve months. Limited service or focused service is doing better right now.
There are multiple cap rates for yield/income capitalization approach. Most of the experts think the story again is good location and various entry market. Occupancy and average rates are, to some, better predictors of hotel values which were the case in previous economic down cycles; however previous appraisals banked on these hotel numbers as well in the good old days of trading.