NEW YORK— Hotel owners— and sellers— waiting for better days should resign themselves to the realization the wait is likely to be a bit longer than originally anticipated, according to Dan Lesser, managing director/Hospitality & Gaming Group for Cushman & Wakefield here. As Lesser told HOTEL BUSINESS®: “While the hotel investment community recognizes the recovery is not a matter of ‘if’ but ‘when,’ it will most likely vary by geography and market segment. Positioning the industry for a strong rebound is the fact new hotel construction has been muted during the past several years.” Specifically, the Cushman & Wakefield executive explained: “Supply growth— which peaked in 1997 at approximately 4.3%— was 1.8% during 2002… with an even lower amount [of new building]projected for 2003.” Overall, however, Lesser contended: “The U.S. Lodging Industry continues to feel the effects of an anemic economy, the slow pace of business and international travel, the recent war in Iraq, and now the worldwide SARS epidemic. As such,” he continued, “those expectations of a significant recovery from the downturn that commenced in early 2001, and was further exacerbated by [the terrorist events of]Sept. 11, 2001, have now been pushed into 2004.” In terms of pertinent financial considerations, Lesser maintained: “Due in part to the current record low interest-rate environment, hotel-investor return requirements are generally lower when compared with [our own survey of]last year. Reduced historical [2002] cash flow at virtually all hotel properties— and bank underwriting based on debt-service coverage— results in conservative mortgage proceeds for refinancings or acquisitions.” Concentrating on the findings of Cushman & Wakefield’s Spring 2003 Investor Survey, one of the more interesting facts uncovered was evidence internal rates of return (IRRs) improved in inverse proportion to the positioning of the hotel, with limited-service sites faring better in this arena than their more upscale lodging-sector brethren. As tabulated, average IRR for limited-service properties at this point in time amounted to 14.8%, while IRRs for full-service hotels chimed in at an average of 13.5% and those of luxury/resort facilities averaged just 13.2%. Vis-à-vis this revised reality, Lesser suggested: “The need for large equity contributions will require investors to be able to weather 12 – 24 months of unremarkable yields in anticipation of a market turnaround. Hotel investors are experiencing a temporary disconnect in cash flows relative to purchase prices,” he added, “as values are based upon ‘what will be’ rather than ‘what was.’ “In summary,” Lesser noted, “we find sophisticated hotel investors are bullish over a two-year to three-year time horizon. Historically, operating performance has been very strong following periods of declining supply growth.” Accordingly, he concluded: “When uncertainty in the world subsides, and the nation’s economy rebounds, the U.S. lodging industry is poised for a period of strong performance.”
Dan Lesser