The Hotel Times - March 2008 - (Page 28)

BROKERAGE OUTLOOK » BY MIKE CAHILL Valuation trends point to active ’08 Despite increasing spreads, tighter ratios, deals should still get done his should should be an interesting year from the perspectives of hotel realestate sales and pricing levels. From 2003 to 2007, the volume of hotels sold was impressive across all asset class levels, from motels to destination luxury resorts. Also during the same time period, the acquisition prices paid by buyers hit record levels, fueled by lower equity yield requirements, a plethora of buyers and a highly conducive debt ﬁnancing market. During the fourth quarter of 2007, the ripple effects of the subprime lending fallout reached the hotel investment market. As a result, the cost of debt and to a lesser extent, its availability, created uncertainty for buyers. Many buyers then attempted to retrade their purchases with sellers, citing the increased cost of mortgage ﬁnancing as the culprit. Active sellers of hotels then took a breather, needing to reassess whether they believe the new, lower pricing was an aberration and whether they were still sellers. Depending on the overall desirability of the asset, the decline in value ranged up to 10 percent. Now that 2008 is under way, there are several trends that are becoming clear: Cost of debt: The risk spreads required by active hotel lenders have increased. The increased spread is partially offset by downward Treasury yields, but the net effect is that the spread is still up. As a result, the cost of mortgage ﬁnancing has increased. Mortgage proceeds: Lenders have become more conservative in terms of loan proceeds with loan-to-value ratios in the 65-percent to 70-percent range. In addition, coverage has become more important, with debt coverage ratios T of a minimum of 1.3 becoming more commonplace. Equity yield requirements: The rates of return required by equity investors, on the other hand, have remained consistent. For premier assets, equity investors might be shaving their requirements to get deals done, but for more commodity-style hotel properties, they appear to be holding. For some deals, the result is a temporary gap between a seller’s pricing expectations and what buyers are willing to pay. Over the future months, this gap will lessen as sellers realize that they either need to become comfortable with getting This continued buy-side push will create an active market in 2008, albeit at slower volume levels than the previous years. slightly less in proceeds than they were expecting in early 2007, or take their property off the market. In terms of hotel sales trends for 2008, buyers still are active and are looking to do deals. This fundamentally is a highly positive market attribute. Hotels have evolved over the past decade to become a standard real-estate industry sector. This continued buy-side push will create an active market in 2008, albeit at slower volume levels than the previous years. hmm@questex.com Michael Cahill is president and founder of HREC – Hospitality Real Estate Counselors. 28 The Hotel Times March 2008 www.TheHotelTimes.com http://www.TheHotelTimes.com

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The Hotel Times - March 2008 Business Outlook Editorial Outlook Contents Conference Preview Capital Outlook What's Driving Growth? European Outlook Development Outlook Fractional Outlook Branding Source List Insurance Outlook Brokers Update Brokerage Outlook Lodging's Balancing Act Transactional Facts Lending Outlook Lenders Source List In Closing

The Hotel Times - March 2008

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