As hotel lodging performance continues to recover from the effects of Covid-19, there have been increasing signs that investors are again buying, selling or refinancing of hotel assets. This comes sometimes in spite of mixed messages as to the speed and strength of this recovery.
Hotel Appraisals & Expectations
A key fundamental of these transactional activities is a realistic expectation of a given asset’s market value which is usually reflected in a formal appraisal.
Given the significant disruption of lodging industry in 2020, it would benefit an investor or operator to have a working knowledge and understanding of hotel appraisal basics. A qualified hotel appraisal professional will be required to follow some basic methodology, principals, concepts and terms.
Hotel Appraisal Criteria
With this goal in mind, an owner or operator should be aware of these focus areas that a hotel appraiser will address:
1 – Regional Economic Data
An analysis of the subject property’s regional economic, social, political and environmental characteristics and understanding market forces that could affect property values throughout the area.
This can include population statistics, major employers and employment changes, traffic counts and changes to transportation infrastructure.
2 – Neighbor and Locational Influences
An analysis of the subject property’s neighborhood which is defined as “a group of complimentary land uses; a congruous group of inhabitants; buildings or business enterprises” (The Dictionary of Real Estate Appraisal, Sixth Edition, Appraisal Institute, 2015, page 156). The neighborhood area has a direct impact on the real estate surrounding it.
While regional influences affect the subject property on a macro level, these same types of influences also affect it on a micro level in the neighborhood. An analysis of these forces in the immediate market area (neighborhood) and effect on the subject impacts the current and future impact on value.
3 – Environment
An analysis of the subject property’s site, environment and facilities. This should include:
- Current or future flood risk
- Current zoning and any potential future changes
- Adequacy of available utilities
- Real estate taxes including an understanding of local assessment process, historical taxation rates and potential future changes
- Subject’s facilities description and are they still relevant to current market trends
- Subject’s brand (if any) quality assurance scores and effect on performance
- Facilities depreciation including economic useful life, effective age and estimated remaining economic life. This should include the structure itself, roof, FF&E or soft goods.
4 – Hotel Supply and Demand Analysis
A current evaluation of the competitive lodging environment dynamics in which the hotel operates is extremely important in developing an expectation of value in a hotel appraisal.
Key areas to focus on include:
- Review of lodging facilities in the market area and confirming a true competitive set for the subject property
- Identification of any anticipated new competitive rooms and when they might impact the market
- Specifically quantify all existing or projected competitive rooms in the subject’s market
- Analyze the current occupancy and average rates of each identified hotel competitor including the respective market orientation and facilities
- Quantify the historic demand trends of the competitive set
- Develop realistic occupancy and average rate projections
5 – Highest and Best Use Question
One of the principal foundations of valuing all types of real estate is the determination of the highest and best use of this real estate. Market forces drive market value. Therefore, the interaction of market forces and highest and best use is extremely important.
When the value of a property is being estimated, the highest and best us analysis will help identify the most profitable and competitive use of the property.
The definition of highest and best use is as follows: “The reasonably probable use of property that results in the highest value. The four criteria that the highest and best use must meet are legal permissibility, physical possibility, financial feasibility, and maximum productivity.” (The Dictionary of Real Estate Appraisal, Sixth Edition, Appraisal Institute, 2015, page 109)