Hotel market now showing signs of life, report says.

The hotel transaction market is at last showing signs of life after almost nine months of inactivity, according to research from Jones Lang LaSalle Hotels. However, the first six months of 2002 have been sluggish, as the market warms to improved demand characteristics and a growing economy.

"The industry is coming to realize that the market has hit bottom, which bodes well for both the operating and investment markets," said Melinda McKay, senior vice president of Jones Lang LaSalle Hotels, who authored the report. "The transaction market is expected to rebound toward the end of 2002 and continue to gather momentum into 2003."

Why this bullish stance? As the economy and hotel market recovers, investors' confidence in the medium to long-term resiliency of the market will build.

The absence of new supply will act as a stimulant, and trailing 12-month numbers will start to look more and more attractive. Pent-up demand will be liberated following almost a year of relative uncertainty and inactivity.

It is anticipated that transaction volume will reach almost $6 billion dollars in 2003, which would represent a peak in activity over the last five years. Average price, per room is predicted to lift by around 25% over 2002 levels if, as envisioned, larger hotels are transacted.

Hotel cap rates soared following Sept. 11, albeit on a knee-jerk reaction. During Q4-01, hotel cap rates experienced a 70-basis point shift, significantly more than the 10-basis point shift for all property types. This increase placed hotel cap rates at one of their highest levels in a decade. Jones Lang LaSalle Hotels' transaction analysis indicated that hotels traded at an average cap rate of 11.5% in 2001, although the range was between sub-6% up to 14%.

"Based on our research and investor surveys, we expect cap rates in 2003 will be representative of historical numbers given the sentiment that the market has reached bottom and investors will be pricing upside moving forward," said Arthur Adler, managing director and CEO-Americas, of Jones Lang LaSalle Hotels.

As we travel through 2002, the capital markets continue to exhibit marked changes since the fall of 2001. The capital markets are responding to an improving economic climate, low interest rate environment and cautious recovery in the hotel sector.

As we progress into 2003, investors will become more confident in underwriting the U.S. hotel sector and, given the pent-up investor demand, this will help create an environment ripe for a record volume of transactions.

"Yet, until hotel performance gathers momentum and investors have more transactions to benchmark against, pricing transactions will continue, to be a challenge and as such valuation ranges will remain wide," concluded Adler.