Not surprisingly, a panel of hotel valuation experts at the Midwest Lodging Investors Summit was unable to definitively answer the question embedded in the session’s title: What Is Your Hotel Worth Today? It wasn’t their individual or collective faults, however; the truth is that no one can say for sure what any particular hotel or portfolio of properties is worth today.
“It all depends on the deal at hand,” said Eric Belfrage, a Columbus, OH-based vice president of CB Richard Ellis Hotels. “Because so few hotel transactions are being consummated, the sales comparability approach to valuation has little credibility in this environment.”
One panelist, Penn State Hospitality Professor and Lodging Hospitality Contributing Editor John O’Neill, was able to share some historical data on the severe drop in hotel values in the past year. According to the Penn State Index of U.S. Hotel Values, lodging values have dropped 17 percent this year, with properties at the top and bottom of the segment spectrum hit especially hard.
“Values should increase by .04 percent in 2010, but the gains will be uneven,” said O’Neill. “The increases won’t start at the beginning of the year, and we’re still forecasting decreases for the luxury segment.”
Assets under $10 million in demand
The panelists agreed that the unavailability of debt is a significant factor in the uncertainty surrounding value. “At some point, buyers are going to start acquiring hotels,” said Dan Beider, senior managing director and chairman of Paramount Lodging Advisors. “And once they focus on a particular segment, values will become clearer and begin to rise.”
It may be the select service segment that breaks the transactions dam, believes Beider, who says the “pool of buyers is huge for assets under $10 million. It’s both people looking to buy single assets as well as larger groups looking at the segment now, but which will probably move to other segments once sales volumes begin to increase.”
The panelists had a lively debate over the best valuation techniques to employ in this volatile market. According to O’Neill, “occupancy and rate, rather than net operating income, are better predictors of value; thus, a revenue multiplier is a useful tool in valuations.”
Suzanne Mellen, managing director of HVS San Francisco and Las Vegas, says it can be a mistake to rely on the rooms multiplier technique. She advocates using a discounted cash flow analysis that assumes the property will be refinanced in the future once credit markets return to normalcy.
New tool gauges market potential
Further discussion among the panelists centered on the role of branding in current valuation scenarios. Perhaps counterintuitively, a strong brand may not be a top-line consideration in assigning value to a property. “In the Chicago market, for example, luxury boutique properties seem to be less volatile than branded hotels,” asserted Bryan Younge, director of the capital markets group for Cushman & Wakefield Illinois. “In fact, while well-branded properties should fare better over the long haul, in the short run, it’s more about the quality of management of a hotel that affects value.”
Following the general session panel on valuation, professor Ray Schmidgall of The School of Hospitality Business at Michigan State unveiled a new tool developers can use to gauge which markets are ripe for development. The Lodging Market Potential Index, which was developed at The School, uses a matrix of 10 data dimensions to determine the cities with the highest long-term potential for hotel investment.
Three indices—hotel market performance, market performance growth and hotel supply and absorption rates—account for more than half of the Index. Other factors range from tourism trends to the performance of other classes of commercial real estate.
A preliminary Index ranking of 16 markets released by Schmidgall shows New York City at the top, followed by San Francisco and Miami (tied) and then Houston and Orlando. Four Midwest markets—Chicago, Minneapolis, St. Louis and Detroit—were among the bottom five.
Schmidgall and his team at MSU plan to expand the Index to 25 markets and perhaps beyond and publish the results on a regular basis.