Hotel transactions show promise for 2010
One way buyers benefit is that they can purchase properties for bargain prices. Past recessions have demonstrated that hotel values typically drop to between 30 and 40 percent of their replacement cost. HVS, a global hospitality consulting organization, conducted a sample of transactions involving U.S. branded hotels in 2009, and they found that current hotel room prices appeared to be close to the bottom-out range and room prices were significantly less now than they were in 2007.
In addition, many highly discounted hotels are located in neglected areas and markets that have halted or slowed development until the economy recovers. This creates a barrier will help prevent buyers from overbuilding in the future.
Most hotel owners are steadfastly clinging to the hope of economic recovery before putting their properties up for sale. According to HVS, the number of hotel transactions that took place in 2009 were roughly one-quarter the number that took place in 2005. On the bright side, private equity funds have raised billions to purchase deeply discounted hotels with equity capital once they’re put up for sale, which means the funds could provide much-needed financing once mortgage debt becomes available again.
Hopefully the combination of private equity capital, a limited number of transactions and slowly improving occupancy rates will result in increased room rates and an improved market, and with any luck, these efforts will only drive the hotel industry to an even more rapid recovery.