By Philippe Masset and Jean-Philippe Weisskopf, Assistant Professors and Pablo Charosky, Research Assistant at Ecole hôtelière de Lausanne, HES-SO // University of Applied Sciences Western Switzerland
Nowadays, most hotel groups maintain light asset structures and focus their full attention on their core business: hotel management. This context has led practitioners and academics to dedicate a particular attention to strategic and operational issues. Nevertheless, real estate still is at the very heart of the hotel industry. The recent subprime crisis, which has begun with the drop of housing prices followed by commercial real estate assets, demonstrates that issues related to hotel property valuation should not be underestimated.
In this article, we use a comprehensive dataset of hotel transactions and take a deeper look into the US hotel real estate market. We examine three related questions: what is the typical value (per room) of a hotel? How has this value evolved since 2000? What are the most expensive and cheapest states and cities in terms of hotel value?
What is the typical value of a hotel room in the United States?
In fact, numerous factors affect the value of a hotel room. For an Upper Midscale mid-sized hotel, the estimated price per room can vary from $50.000 up to $150.000 depending on its location. The hierarchy between the various scales is generally well respected. Luxury properties are, by far, the priciest and their value strongly depends on the hotel chain they belong to: for example, a room in a Four Seasons is on average worth close to 350% more than a room in an ordinary hotel from the Upper-Midscale segment. Upper-Upscale and Upscale properties display a premium of respectively 40% and 30% compared to the Upper-Midscale segment, while Midscale and Economy hotels exhibit a discount of 20% and 35%. Furthermore, the impact of offering limited or full services depends on the standing of the hotel. For superior categories, being full-service has a positive effect on value, whereas for lower scale brands, the impact is often negative. The size of the property also matters. Smaller "boutique" hotels and large hotels (which generally offer extensive facilities) feature a higher value per room than, more common, mid-sized properties.
The figure reports the evolution of a hotel real estate price index (own estimates based on transaction data), a hotel REITs price index (own estimates based on all hotel REITs listed in the US) and the S&P 500. The hotel real estate price index has increased by more than 60% between 2000 and 2007. It has then severely declined during the financial crisis, rebounding in 2010 only. An indirect investment through hotel REITs has generally delivered higher returns than a direct investment in hotel properties, but the latter has been less volatile and also much less severely hit by the financial crisis. Overall, hotel investments have performed better than stocks but, since 2010, the S&P 500 seems to be progressively catching up with the hotel index.
The table displays the 5 most and least expensive hotel markets, classified by cities and states. Only cities of at least 1 million inhabitants are considered in this analysis. The first observation that can be made is that the geographic location of a property has a strong impact on its value. Indeed, the same hotel could have its price more than doubled if sold in Detroit or Los Angeles. New York City leads the country, with a premium of about 53% compared to the price observed for similar properties in a rural place on the Pacific coast (used as a point of comparison). Several cities located in California or along the Boston-Washington corridor follow. At the bottom of the ranking, one finds mostly cities from the Midwest. The situation of Ohio, with three cities ranked amongst the cheapest in the USA, is quite striking. Hotel values in this state are on average 42% lower than in California (which serves as a point of comparison). Hawaii displays, by far, the highest hotel values of all states. It is followed by Alaska and New-York state. The District of Columbia, due to its particular status is not reported in this table, but it also displays one of the highest price levels in the country.
The findings of our analysis underline the variability of hotel real estate prices and the factors that affect them. Investing in hotel real estate, directly or indirectly is therefore a delicate decision that requires a thorough analysis.