We live in extraordinary times. There are only a limited number of periods in America's 245-year history which have been as transformative as 2020 (i.e., 1776, 1865, 1929, 1945, 1968, 2001). The confluence of a global pandemic, mass civil disobedience, and the transfer of power will undoubtedly affect how we live and work in 2021 and beyond.
As we enter month nine of the pandemic, the hotel sector remains challenged, transactions are scarce, and from the perspective of someone who doesn't live hotels day in and day out, values seem to be a guessing game. And in this period of extreme volatility and uncertainty, there is a tendency to make hasty and potentially costly decisions. But it is precisely during these times when taking a rational and long-term view is paramount. Reliance on data and sensible intelligence to form value opinions has never been more important. While this article does not provide absolute clarity, it is intended to be informative and perhaps assist in the quest for price discovery.
Today's global travel sector, which many characterize as being "on the brink of collapse," is simply unprecedented. Seven months into a 100-year worldwide pandemic which caused a swift, wide, and deep economic recession has decimated key travel and leisure related industries including airlines, car rentals, cruise lines, ridesharing, and tour operators. While stock markets have rebounded to near record levels, the US lodging industry continues to experience crippling stress as travel demand, which has experienced a sharp and sustained decline, continues to significantly lag pre-pandemic levels.
The year 2020 will not be soon forgotten as the spread of COVID-19 and society's reaction to the virus have combined to devastate the global economy. U.S. GDP in the second quarter declined by 32.9 percent on an annualized basis, the most significant quarterly decline observed since the 1940's. While the stock market has rebounded considerably from its lows and seems to be reflecting an optimistic view regarding an economic recovery, base case will be a slow and very bumpy re-opening of the economy.
n the case of property tax assessments in Florida, probably somewhat less than the county property appraiser assumes. A recent court decision invalidated the method used by many county property tax appraisers in Florida to develop "just" values for hotels.
As of the end of January 2020, prior to the closures of businesses determined to be non-essential and the announcement of stay-at-home recommendations due to COVID-19, the Las Vegas Convention and Visitors Authority (LVCVA) indicated that construction of over 12,000 hotel rooms was scheduled to be completed by 2023. While all announced projects may have not ended up being completed, strong visitation over the past few years, overall market hotel/motel occupancy of 88.9% in 2019, and the construction of projects that were expected to be major demand generators, warranted the development of significant guestroom supply at that time. While the pandemic has caused a few major projects to be put on hold, the continuing development of several major projects will be beneficial for the recovery of the Las Vegas market.
The practice of asset management for hotels entering the third decade of the 21st Century has evolved into an intricate process of analyzing layers of data and operating results, and then acting based upon the conclusions. The process requires great focus. Asset management is the practice of managing the value of the owner's investment. And now that process becomes more urgent, but also more important than ever before.
As the COVID-19 crisis grows in the US and elsewhere outside China, hotels and restaurants are among the businesses hardest hit. In select markets like Seattle and San Francisco, hotels are reporting single digit occupancies and crushed ADRs. Many hotels do not have the cash flow to keep their doors open. The major hotel companies are talking of furloughs for tens of thousands of hotel employees and many properties are looking at closure or skeleton team maintenance operations.
Along with all the other industries around the world the U.S. hotel industry has been blindsided by the COVID-19 Global Pandemic Black Swan Event. Instantly, hotel owners have found themselves with empty hotels, depleted cash reserves, and wondering how they will be able to make their monthly mortgage payments and payroll which were hardly ever considered to be a problem in the expansionary period leading up to COVID-19.
At several points during 2019 many market participants believed the grind higher was going to come to a halt. However, this did not occur, even after a tumultuous 4Q18 where many experts were calling for a downturn. Although America's nancial system has been bueted by a slowing global economy and the U.S. instigated trade war with China, it has been buoyed by the lowest unemployment levels during the past 50 years, and rising incomes which have fueled consumer spending and a generally optimistic sentiment.
As expected, hotel transaction volume fell to a historic low during the peak of the Great Recession in late 2009, a drop that began roughly 24 months earlier at the end of 2007. Similar to the rebound in performance, transaction activity among economy hotels recovered rapidly, but soon declined as investors shifted their focus to midscale and upscale hotels, which recovered more slowly from the recession.
HVS continually tracks the rates of return on the assets on which we consult. In our most recent review, we found that equity yield rates, on average, have shown a continued trend of decline in the full-service and luxury hotels sector, as well as the lower-tier limited-service sector, with the select-service and upscale limited-service sector showing stability.Equity yield rates were notably lower for full-service and luxury hotels, averaging 16.4% for the year-to-date 2019 period, which is 140 basis points (bps) below the 17.8% most recent peak level recorded in 2017.
While the U.S. continues to be in the midst of its longest uninterrupted economic expansion in modern history, slowing growth metrics along with abundant geopolitical uncertainties are heightening perceived risk of impending recession.
With 121 consecutive months of growth through Q2 2019, the U.S. economy is now in record territory for the longest expansion period in history. The decade long economic expansion has been fueled in part by job growth, record low unemployment rates, and low-interest rates in the capital markets. During the first half of 2019, America has continued to add jobs, albeit at a slower pace compared to last year. U.S. consumer confidence remains vigorous and stock market indices continue to set record high levels. To mitigate the risks of slower global growth and trade-policy uncertainty, during the near term, the Federal Reserve is widely expected to reduce interest rates. While current economic indicators are a healthy backdrop for the lodging industry, the duration of this expansion has rendered many economic pundits now fearful of the U.S. entering a recessionary environment during the near term. With this said, most anticipate that when a recession does occur, it will be less severe than the Great Recession of 2009-2009.
In 1919, two grand hotels were racing to completion. The Hotel Commodore connected to Grand Central Terminal and owned by The New York Central Railroad officially opened on January 28, 1919. Named after 'Commodore' Cornelius Vanderbilt, the founder of The New York Central Railroad System, it had a whopping 2,000 guestrooms. It also housed the single largest room ever constructed.
Recently, my partner, Guy Maisnik, and I spoke about hotel retail mixed-use development with Kelsi Maree Borland of GlobeSt.com. Her article, Why Retail Owners Are Partnering With Hotels ran with the subtitle, With retail evolving to be more experience-driven, retail owners are finding the benefits of adding boutique hotels to shopping centers.
Following a year of robust transaction activity, hotel capitalization rates remain stable, while hotel NOI and values are under pressure due to slowing RevPAR growth and increasing operating expenses. This article looks at hotel sales and capitalization rate trends, the impact of slowing RevPAR growth on hotel values, and the outlook for 2019. [1]
A possessory interest is created when a private-sector tenant is granted exclusive use of real property (land and/or building) that is owned by a tax-exempt entity, typically a municipality or a state or federal government agency. The right to occupy and use the land and/or building is usually conferred via a lease
Hurricanes Michael and Florence are both gone, but the extent of their destruction is now coming into clearer focus.
HVS continually tracks the rates of return on the assets that we consult on. In our most recent review, we found that equity yield rates, on average, have been declining, due in part to the expectation of slowing EBITDA Less Replacement Reserve growth. The sample size of available data is also a contributing factor.