Update to the HVS Employment-Hotel Growth Index

We've updated our research on the correlation between a metropolitan market's employment levels, office space absorbtion, and hotel performance with some context from the recession.

The market has changed substantially since we first published our research on the relationship between employment levels, office space absorption, and hotel room night demand via the HVS Employment-Hotel Growth Index in August of 2008.

Led by the bust in the housing market, performance in the commercial sector took a sharp downturn in the fall of 2008, and the current recession has negatively impacted all sectors of the commercial real estate market. With this update, we set out to see whether the relationships between employment and hotel performance held true through year-end. Specifically, within the greater Washington, D.C. market, did the change in the employment picture have an impact on the health of the office market, and, if so, does the correlation between office market demand and hotel room demand still hold true? Conversely, we wondered whether we would witness a lag in the demand indicators coming into the recession. Of course, the inaugural events of January of 2009 created an anomaly in our hypothesis (though they gave the D.C. and surrounding hotel markets a remarkable boost).

First some statistics:

Employment (Source: U.S. Bureau of Labor Statistics):

• Employment Change Year End 2008 – 27,919 jobs (+1.16%)
• Unemployment Rate Year End 2008 – 4.7%

Office (Source: CoStar):

• Year End 2008 Vacancy Rate – 11.8%
• YTD 2008 Net Absorption – 498,223 square feet
• YTD 2008 Deliveries – 8,678,864 square feet
• Year-End 2008 Occupied Space– 368.9m square feet (+1.27%)
• Year-End 2008 Under Construction – 12,702,704 square feet
• Year-End 2008 Average Quarter Rent - $34.36/square foot (+0.3%)

Hotels (Source: Smith Travel Research):

• Year-End 2008 Occupancy Rate – 67.1% (-1.8%)
• Year-End 2008 Deliveries - 3,550 Rooms
• YTD 2008 Demand Change – 445,577 Rooms (+1.1%)
• Year-End 2008 Under Construction – 4,000 Rooms
• Year-End 2008 ADR - $153.31 (+2.3%)

The data suggest that through year-end 2008 both office and hotel market demand moved in pace with the increase in employment. These trends are in line with the historical data presented in this study. We note, however, that total employment fell by 1.5% in January of 2009 and 2.1% in February of 2009 compared with the same months of 2008. Smith Travel Research reported that occupancy was up 2.5% in January because of the inauguration, but was down 1.9% in February. Although the decreases in employment and hotel demand recorded in February were of comparable magnitude, only time will tell if the correlation observed in the “up-market” years of 2003 to 2007 holds true through a down market.

We will be updating the index with new data and taking a look at how it applies to markets with differing ratios of office space to hotel rooms in the coming months.

About David Fuller | David Fuller, Managing Director of the HVS Washington, D.C. office, has over 17 years of experience in real estate valuation, investment analysis, and consultation. He has a diversified background in the valuation of hotel, commercial, and mixed-use properties nationwide, with extensive experience in market value appraisals, property portfolio consulting and management, investment advisory service, and consulting studies for securitization-equity-based and mortgage-backed transactions. David’s consulting and valuation experience encompasses the research and analysis of real estate markets throughout the Mid-Atlantic and appraisals of hotel properties across the United States. His bank of appraisal assignments includes hotels and motels, industrial facilities, shopping centers and malls, office buildings, subdivisions, golf courses, condominiums, and apartment complexes. He is a Designated Member of the Appraisal Institute (MAI) and a State Certified appraiser in several states. David also proudly serves on several community boards, including the Board of Directors for the Cleveland Park Club of Washington, D.C. Contact David at (202) 828.9666 or .