There is no question that during this recession, the combination of both limited credit availability and declining earnings has led to a swift and dramatic erosion of the market value of all types of lodging facilities.
The absence of any significant volume in US hotel sale transactions has meant limited transparency as to the market re-pricing of assets, and therefore little if any empirical evidence to quantify the magnitude of decline of US hotel prices. During the next 12 to 18 months, loan maturities and the workouts of hotel investment failures will compel transactions to occur, which will eventually provide the market with pricing clarity and ultimately narrowing the longstanding bid/ask standoff between buyers and sellers of US hotels. Once sale transactions resume in earnest, the market will then establish the current true value of US hotel properties, allowing comparisons to the peak of 2007. In today's "hazy" pricing environment, many assert their "gut" reaction that hotel prices have declined upwards of 50% from the crest--a notion which will ultimately be proven true or false by evidence gleaned from a liquid transactional market.
The availability of high levels of relatively inexpensive hotel debt and equity peaked in early 2007, and resulted in a Weighted Average Cost of Capital (WACC) or a capitalization rate of 6.2%, a decline of 240 basis points (bps) from 2005. Today, almost two years after the pinnacle, a dramatic rise of 380 bps of the WACC of US hotels results in a 10% capitalization rate. An examination below of the implied value of $1,000 of net operating income (NOI) indicates a 38% decline in value from the peak, solely as a result of the dramatic shift in the capital stack structure and return requirement of US hotels.
The following analysis provides a preview of what the market will ultimately confirm. The three tables below illustrate statistical calculations of the recent movement of US hotel asset prices due to changes in capital stack structure and return requirements, as well as lodging profits.
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Source - Globe Street
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