PROPERTY SECTORS

Lodging, apartments, retail, office and industrial property sectors are represented on the following pages with data provided by VIL representatives. Pertinent market factors were accumulated including inventory, vacancy, historical and forecasted absorption, historical and forecasted value change, forecasted construction and years to balance.

Operating Fundamentals

The year 1995 marked the third consecutive year of strong recovery for the national lodging market. The national annual occupancy estimate of 66.5% belies stronger market locales, in which 1995 occupancy levels climbed to 70-75%. The year 1995 marked the second consecutive year that the average daily rate (ADR) increased at a faster pace than inflation. Combined with the increase in occupancy, the increase in ADR resulted in a healthy. escalation in room revenue. The continued improvement in operating fundamentals of hotels has captured the attention of lenders and investors. Hotel acquisition prices are being bid up, while capitalization rates and yield rates are declining, due to the increased pool of prospective purchasers, as well as the increased availability of both debt and equity capital.

Greater Availability of Capital

The improvement in operating fundamentals has increased the availability of both debt and equity capital in the lodging industry. The upcoming year will also witness a continuation of a trend that emerged in late 1995, in which major life insurance companies re-entered the lodging market, providing competitive fixed rate mortgages for full-service hotels. Mortgage rates and underwriting criteria have eased as a result of improved performance and marketability of hotels, as well as renewed competition among lenders.

Additionally, REIT IPO's gained significant momentum during late 1995. The IPO's of Hospitality Properties Trust and Patriot American Hospitality exceeded $200M and $350M, respectively.

Unregulated private lenders are also moving into the market, providing the immediate infusions of short-term cash and expanding the source of financing for real estate purchases and immediate refinancing. Thus, there are a wide array of financing vehicles returning to the market.

New Construction, Brand Expansion & Brand Repositioning

The significant absence of lodging construction in recent years should result in 1996 representing the first year of a construction boom cycle across the United States. The majority of the new construction will consist of low- and mid-priced limited-service hotel products, which have low barriers of entry into the marketplace. Full-service hotels, which operate with higher expense ratios, are less attractive to lenders presently. Most prospective developers of full-service facilities are seeking community participation, primarily in the form of TIF or tax abatement, to defray development costs.

Virtually all hotel franchise companies are launching aggressive development plans in an effort to gain greater market share during the remainder of the 1990's. Most franchise companies are developing a limited-service product, and they are aggressively planning 85 to 250 new hotels by the year 2,000. The balance of the 1990's will witness franchise companies aggressively jockeying for market dominance. The fact that the wave of construction anticipated during the remainder of the 1990's is so narrowly focused on the limited-service product is alarming to many lodging industry analysts and lenders. The American appetite for limited-service lodging products will be tested, and the explosion of literally thousands of new limited-service lodging facilities across America may have long-lasting supply/demand implications.

Currently, the development of full-service properties is not as aggressive, but existing properties operating under the Holiday Inn, Howard Johnson's, and other long-standing flags are being upgraded in an attempt to revitalize the brand's perception among the public. The modernization and refurbishment programs imposed by the chains will result in the termination of many properties from the chain affiliation. It is likely that the properties expelled from these chains will be repositioned downward in the low- and mid-priced markets. Some companies are selectively acquiring such properties to extensively refurbish and re-flag, thus, expanding the brand presence at a cost that is less than the new construction equivalent.

Summary

The increase in hotel profitability in recent years, along with the void of new construction since the late 1980s, and the flooding of new capital sources into the market are factors that should make 1996 a watershed year in the lodging industry. The year 1996 should see stabilizing occupancies in many markets, but ADRS should continue to increase until the impact of new construction is felt by existing properties. Prices for existing hotels will continue to be bid up, particularly while REITs and franchise companies remain active. New construction will occur, but will largely consist of limited service products in 1996. At present, the uniformity of anticipated new construction is causing some concern among investors, who fear the one dimensional nature of new construction may result in a return to excessive competition in the limited-service segment of the marketplace.

In many ways, 1996 may mark the beginning of an interesting development/redevelopment cycle within the hotel industry. An integral component of any financial analysis of an existing or proposed lodging product in 1996 should include a thorough examination of future competition, whether planned construction or the refurbishment/repositioning of existing competitors in the marketplace.