An eagerly awaited uptick in occupancy and daily rates has sparked a seller's market for prime hotel properties. Case in point: Host Marriott earlier this summer bought the 450-room Fairmont Kea Lani Maui hotel in Hawaii from Fairmont Hotels and Resorts for $355 million. The deal yielded a tidy profit for Fairmont, which paid $250 million for the property in February 2001.

In another bellwether deal last year, San Diego's 688-room Hotel del Coronado sold to CNL Hospitality Properties for $385 million, or $591,000 per room. Lowe Enterprises paid $330 million for the landmark hotel in 1997. The Coronado sale was one of several big deals that closed in 2003 [see chart].

“If you're a seller, now is the time to put your hotel on the market,” says Stephen Rushmore, president of hotel consulting firm HVS International. “There are many buying opportunities out there as values head up over the next few months.”

Pent-up demand to buy is being driven by improving fundamentals. Through the first five months of 2004, revenue per available room (RevPAR) for the top 25 U.S. markets jumped 10.5% versus the same period in 2003, reports Smith Travel Research. What's more, PricewaterhouseCoopers projects that nationwide occupancy will rise 1.6% this year.

Hotel research firm Lodging Econometrics reports that the average sale price of 573 hotel transactions last year was $70,308 per room. That was a steep increase over the 587 hotel sales tracked in 2002 that returned an average sale price of only $60,947 per room.

“Prices are high, but it's a good buying opportunity if you believe that supply risk is the number one problem over the next five years,” says Rushmore.

With fewer lenders financing major hotel developments, Rushmore says that the pipeline is relatively dry — and that bodes well for hotel values. Smith Travel Research projects that new supply will only increase by 2% this year, which is well below the 4% per year supply growth experienced in the mid-1990s.

Sellers will continue to fetch tremendously high prices for their hotels over the balance of the year, predicts Rushmore. Three strong hotel markets that investors should have on their radar screen include Memphis, Miami and Washington, D.C. HVS projects that the value of a hotel room in Miami will increase by 75% between now and 2006.

Conversely, Rushmore believes that Detroit, Nashville and New Orleans currently offer good selling opportunities because overall values are projected to remain flat or increase only marginally in those markets over the next few years. In New Orleans, for example, the average value of a hotel room is only expected to rise by $2,000 between now and 2006. The value of a New York City hotel room, by comparison, should appreciate by $237,000 over that period based on HVS data.

Says Rushmore: “You'll see rapidly increasing values over the next year, and even a moderate climb in interest rates won't stop that.”

BY THE NUMBERS: MAJOR HOTEL SALES OF 2003

Location No. of Rooms Price Per Room
1. Hotel del Coronado San Diego, Calif. 688 $591,000
2. Hyatt Regency Maui Lahaina, Hawaii 837 $384,000
3. Lansdowne Resort Leesburg, Va. 305 $380,000
4. Castle At Tarrytown Tarrytown, N.Y. 31 $352,000
5. Ritz-Carlton
Palm Beach
Lantana, Fla. 270 $341,000
Source: HVS International