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Hotel sales prices: mixed signals.

When analyzing the sales price data for the 624 hotel transactions PKF Hospitality Research tracked in 2004, we find divergent trends. On the one hand, the "average" sales price for hotels that were bought and sold in 2004 increased 5.4 percent over 2003. Given the improved market conditions, this is intuitively a logical trend. On the other hand, the "median" sales price for hotels transacted in 2004 declined a slight 2.1 percent during the year. This runs contrary to the improvements in both performance indicators and investment attitude that we observed during the year.

What do these divergent trends in hotel sales prices mean? We believe this is an indication that hotels sale prices, like occupancy and average rate trends, differ from market to market and property type to property type. As hotel operators know, national statistics are good indicators of the overall health of the lodging industry. However, when it comes to benchmarking the performance of their property, it is the local market statistics for their property classification that count. This is because close to 75 percent of a hotel's operating performance is based on local market conditions.

What we find when analyzing the different levels of transaction data is that hotel sale prices differ from market to market. For instance, both the average and median hotel sale price increased in the New England/Middle Atlantic and Mountain/Pacific regions in 2004. On the other hand, both sale price indicators showed a decline in the South Atlantic and South Central regions of the nation for the year. It is interesting to note that the decline in South Central region sale prices is consistent with the relative lackluster market performance of that region. On the other hand, hotels in the South Atlantic region experienced the greatest regional increase in RevPAR in 2004, yet the average and median sale prices in this region declined during the same period.

Conflicting sales trends are also observed when comparing full-service and limited-service prices. While both segments of the industry enjoyed healthy gains in RevPAR during 2004, full-service hotels experienced a slightly higher increase (9.7% vs 8.2%). Bucking this trend, both the average and median sales price for full-service hotel transactions in our database declined in 2004. Meanwhile, the average limited-service hotel sold in 2004 for a price 5.1 percent greater than 2003. Once again, we observe some buyer/seller behavior that is inconsistent with market performance.

Another influence on the relative movement of hotel sales prices is the strong transaction activity observed in 2003. Anticipating strong industry recovery, hotel investors were optimistic and aggressively pursuing potential purchase opportunities in 2003. This passion contributed to the significant gains seen in sales prices during the year. Therefore, the ability to achieve gains in 2004 prices was limited due to the strong increases already achieved in 2003.

When using medians and averages, people must be aware of all the data that influences these statistics. Therefore, it is important to note that there was a higher contribution of full-service and larger hotels in our sample in 2004 versus 2003. Logic would attribute the increase in the average sale price to be influenced by this shift in the sample. However, the decline in the overall median sale price is indicative of a heavier volume of transaction activity involving hotels in the lower end of the market.

Overall, PKF Hospitality Research believes that the U.S. hotel industry is well on the road to recovery. We are projecting strong growth in operating profits for 2005 and beyond. This growth in the bottom-line should serve to increase the "value" of hotels. However, hotel sales prices are influenced by factors other than just profits. We don't interpret the decline in the median sales price of U.S. hotels to be an indicator of poor market conditions, rising cap rates, or a decline in investor confidence. Instead, we believe that hotel buyers are acting prudently and purchasing hotels at reasonable prices that make sense for their investment criteria and local market conditions.

When conducting hundreds of market studies throughout year, PKF consultants realize that the merits of each potential hotel development need to be examined based on the unique circumstances of that deal. So it is with hotel purchases.
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Title Annotation:market trends
Publication:Quarterly Trends in the Hotel Industry (USA)
Geographic Code:1USA
Date:Mar 1, 2005
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