Top Ten Lodging Investment Trends And Challenges

Each year, the think tank members of “LIIC – The Lodging Industry Investment Council” are surveyed to develop a list of the major hotel investment opportunities and challenges for the coming year.

HREC Investment Advisors This survey results in the LIIC Top Ten; a well-regarded profile of investment sentiment and attitudes for the lodging industry for the forthcoming 12 months.

All together, the members of LIIC represent acquisition and disposition control of billions of dollars in lodging real estate. The hospitality industry’s most influential investors, lenders, corporate real estate executives, REIT’s, public hotel companies, brokers and significant lodging equity sources are represented on the council. LIIC serves as the leading industry think tank servicing the hospitality business (

This year’s survey was compiled by LIIC’s co-chairman, Michael Cahill. Mr. Cahill is president and founder of HREC – Hospitality Real Estate Counselors, one of the nation’s top hotel and casino advisory and brokerage firms (

The results of the survey are as follows:

10. Lodging investors should be on the lookout for new supply additions, which are anticipated to increase significantly in 2006 and 2007. This pace of new development is expected to exceed that experienced by the lodging industry in the mid 1990’s.

9. In general, hotel occupancy levels are forecasted to increase 3 to 5 percentage points over the next 12 months. LIIC members anticipate average room rate growth to lag occupancy increases and average roughly 2 to 3 percent over the coming year. Almost across the board, LIIC members cite the need for hoteliers to reign in the internet distribution channels to help push ADR’s.

8. At the luxury hotel level, the trend toward mixed-use development will increase dramatically. Condo-hotel rooms, fractionals and timeshare units will be commonplace parts of the luxury hotel development process.

7. Hotel investors need to closely watch the expense areas of: deferred bonuses and compensation expected from senior hotel management, higher overall payroll expenses as staffing returns to normal levels, energy expense escalation (above inflation) and workmen’s compensation expenses (especially California).

6. Equity investor return requirements will continue to slide downward with stabilization occurring at the end of 2004 when property level cash flow begins to increase. Leveraged equity IRR’s in the low to mid-teens will remain commonplace for institutional quality assets, a parallel trend with cash-on-cash returns is predicted.

5. The majority of LIIC’s members anticipate interest rates to remain flat or increase very slightly over the next 12 months. Low interest rates are expected to help fuel continued hotel valuation increases. Some concern exists over a strong increase in interest rates after the presidential election.

4. Hotel buyers need to be extremely cautious of deferred maintenance and capital expenditures; especially for mid-market hotels and lodging facilities that have been hit hard by the downturn with minimal or negative cash flow. Also, large PIP’s (Product Improvement Plans) from major lodging franchisors are a threat to investment yields, especially when a change of ownership occurs.

3. When asked about the when the next "peak" of the hotel investment cycle will occur, there was no common thread among the LIIC member’s responses. The results ranged all the way from “we are peaking now” to 2008.

2. The volume and quality of (especially upscale) hotel assets on the market are anticipated to increase significantly as existing owners exit seeking to redeploy their capital causing a release of pent-up inventory that was not brought to market during the recent downturn and lender REO’s (Real Estate Owned) accelerate. The “diamonds in the rough” will be increasingly difficult to buy at rock-bottom prices. Multiple members predict that the sheer volume of transactions over next year may approach peak 1998 levels

1. Hotel values are predicted to continue to increase 5% to 15% over the next 12 months with pre 9/11 levels possible for certain assets within two years. However, watch out for the possible negative impact on asset value from another domestic terrorism attack, international political unrest or an unforeseen strong uptick in interest rates. Overall, LIIC members are highly optimistic about the coming year.

For additional information, please contact: LIIC – The Lodging Industry Investment Council Co-Chairmen Michael Cahill, President, HREC – Hospitality Real Estate Counselors: Sean Hennessey, President, Lodging Investment Advisors:
Vice Chairman Jim Butler, Partner, JMBM - Jeffer Mangels Butler &

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