Every so often I like to look at the current relationship between a hotel’s market value and its replacement cost. This information is useful in setting strategies for new hotel, acquisitions, when to buy and when to sell. It can also forecast volatility.
A’s market value is the price at which it will sell in an open market where buyers and sellers are acting in their own self-interest without any pressure to buy and sell, and with full knowledge of the market. Market value for a hotel is generally estimated through an income valuation model where future net income is capitalized into value.
Replacement cost is the total development cost to build a hotel including the acquisition of the land,of the improvements and furnishing the property with furniture fixture and equipment.
I have been tracking the relationship between a hotel’s market value and its replacement cost since 1987 for two different classes of hotels: Luxury Hotels and Mid-Price Hotels. The following graphs show the change in market value and replacement cost over this period of time.
Before we evaluate each of these, a brief review of hotel economic trends over this period of time might be helpful:
• Between 1987 and 1989, the U.S. hotel industry was booming. The savings and loan industry coupled with highly favorable income tax benefits fueled a huge building spree.
• A massive recession and crash occurred in 1990 and ‘91 when the S&L industry experienced severeproblems. Travel slowed, hotel values declined and the overbuilding sent hotel occupancies falling.
• The recovery between 1992 and 2000 was slow, with hotel values
• The events of 9/11 coupled with another recession drove values down again. A turnaround occurred in 2003 and by 2007 hotel values peaked at record levels.
• With the bubble bursting in the housing and banking industries in 2007 and 2008, values went into a freefall with many markets seeing declines of 30% to 50%. Today we are slowly starting to recover.
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