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Fourth Quarter 2015: Large Hotels Have Lost Momentum— Small Hotels Still Going Strong, Crocker H. Liu Ph.D., Adam D. Nowak Ph.D., Robert M. White Jr. Jan 2016

Fourth Quarter 2015: Large Hotels Have Lost Momentum— Small Hotels Still Going Strong, Crocker H. Liu Ph.D., Adam D. Nowak Ph.D., Robert M. White Jr.

Cornell Real Estate Market Indices

Although the price of large hotels has declined, small hotels continue to experience positive momentum, based on our Standardized Unexpected Price (SUP) metric. Hotel investment based on operating performance is back in the red, with signals that investors are experiencing negative leverage, since the borrowing cost of debt now exceeds the return on invested capital. Our financing, risk, and early warning indicators all continue to suggest that hotel prices should start to level off or decline. This is report number 17 of the index series.


Third Quarter 2015: Have Hotel Prices Peaked?, Crocker H. Liu, Adam D. Nowak, Robert M. White Oct 2015

Third Quarter 2015: Have Hotel Prices Peaked?, Crocker H. Liu, Adam D. Nowak, Robert M. White

Cornell Real Estate Market Indices

The price of large and small hotels appears to have peaked, based on our Standardized Unexpected Price (SUP) metric. Hotel investment based on operating performance is in the black (breakeven). Indicators that hotel prices should start to level off or decline include the historical cycle analysis, a continued rise in cost of debt financing, a widening of the relative risk premium for hotels, higher total risk for hotels relative to other commercial real estate, and continued declines in the hotel REIT index, business confidence index, and the architecture billings index. This is report number 16 of the index series.


Second Quarter 2015: Hotel Deals Are Getting Harder To Pencil Out, Crocker H. Liu, Adam D. Nowak, Robert M. White Jr Aug 2015

Second Quarter 2015: Hotel Deals Are Getting Harder To Pencil Out, Crocker H. Liu, Adam D. Nowak, Robert M. White Jr

Crocker H. Liu

Hotel Investment based on operating performance has turned red. Our Economic Value Added (EVA) indicator shown in Exhibit 1 has turned negative, declining from -.6% (near zero; breakeven) to -1.8% in 2014Q1. What is more alarming is that the hotel cap rate (5.7%) is approximately equal to the cost of debt financing (5.6%) for hotels financed by large life insurance companies, as shown in Exhibit 2. Intuitively, the cap rate represents the return on hotel properties assuming all-equity financing. The use of debt financing is used to magnify the return to hotel properties. For positive leverage (return ...


Second Quarter 2015: Hotel Deals Are Getting Harder To Pencil Out, Crocker H. Liu, Adam D. Nowak, Robert M. White Jr Jul 2015

Second Quarter 2015: Hotel Deals Are Getting Harder To Pencil Out, Crocker H. Liu, Adam D. Nowak, Robert M. White Jr

Cornell Real Estate Market Indices

Hotel Investment based on operating performance has turned red. Our Economic Value Added (EVA) indicator shown in Exhibit 1 has turned negative, declining from -.6% (near zero; breakeven) to -1.8% in 2014Q1. What is more alarming is that the hotel cap rate (5.7%) is approximately equal to the cost of debt financing (5.6%) for hotels financed by large life insurance companies, as shown in Exhibit 2. Intuitively, the cap rate represents the return on hotel properties assuming all-equity financing. The use of debt financing is used to magnify the return to hotel properties. For positive leverage (return ...


First Quarter 2015: March Madness: Hotels Remain Hot, Crocker H. Liu Ph.D., Adam D. Nowak Ph.D., Robert M. White Jr. Apr 2015

First Quarter 2015: March Madness: Hotels Remain Hot, Crocker H. Liu Ph.D., Adam D. Nowak Ph.D., Robert M. White Jr.

Cornell Real Estate Market Indices

The borrowing cost of debt financing continues to remain stable, while the cost of equity financing has declined relative to the previous period. Mixed signals exist as to the future direction in the price of large hotel properties near term but prices for small hotel properties should continue to rise in the next quarter. We continue to hope that operating performance as measured by EVA will finally become positive at best and or continue to remain at breakeven at worst. This is report number 14 of the index series.


Fourth Quarter 2014: Ending 2014 In The Black: Introducing The Sup Performance Metric, Crocker H. Liu Ph.D., Adam D. Nowak Ph.D., Robert M. White Jr. Jan 2015

Fourth Quarter 2014: Ending 2014 In The Black: Introducing The Sup Performance Metric, Crocker H. Liu Ph.D., Adam D. Nowak Ph.D., Robert M. White Jr.

Cornell Real Estate Market Indices

The borrowing cost of debt financing continues to remain stable while equity financing continues to remain relatively cheap. We expect prices for large hotel properties to remain flat, but prices for small hotel properties to rise in the first quarter of the new year. We hope that operating performance as measured by EVA will finally become positive vis-à-vis an increase in the cap rate, assuming that total borrowing cost remains stable or it becomes cheaper to borrow debt or equity money. We also introduce a new performance metric, the standard unexpected price (SUP). This is report number 13 of the ...


Third Quarter 2014: Hotel Prices Decline On A Year Over Year Basis: Expect This Trend To Continue, Crocker H. Liu Ph.D., Adam D. Nowak Ph.D., Robert M. White Jr. Oct 2014

Third Quarter 2014: Hotel Prices Decline On A Year Over Year Basis: Expect This Trend To Continue, Crocker H. Liu Ph.D., Adam D. Nowak Ph.D., Robert M. White Jr.

Cornell Real Estate Market Indices

The borrowing cost of debt financing continues to remain stable while equity financing has become relatively cheaper. We expect prices for hotel properties to fall slightly in the next quarter. This is not necessarily bad news since it will give operating performance as measured by EVA a chance to continue to increase vis-à-vis an increase in the cap rate, assuming that total borrowing cost remains stable or it becomes cheaper to borrow debt or equity money. This is report number 12 of the index series.


Second Quarter 2014: Prices Rise As Expected, Moderate Price Growth Is Anticipated, Crocker H. Liu Ph.D., Adam D. Nowak Ph.D., Robert M. White Jr. Jul 2014

Second Quarter 2014: Prices Rise As Expected, Moderate Price Growth Is Anticipated, Crocker H. Liu Ph.D., Adam D. Nowak Ph.D., Robert M. White Jr.

Cornell Real Estate Market Indices

Prices do reflect RevPAR. In the previous issue (2014Q1), we had revisited the year-over-year change in RevPAR relative to our Repeat Sale Index. Since we showed that the year-overyear change in RevPAR is a leading indicator of price fluctuations in hotel properties, we expected prices to reflect the positive momentum in the second quarter. The second quarter has come and gone, and we are happy to report that prices have increased as predicted.


First Quarter 2014: Prices Have Not Caught Up To Growth In Revpar, Crocker H. Liu Ph.D., Adam D. Nowak Ph.D., Robert M. White Jr. Apr 2014

First Quarter 2014: Prices Have Not Caught Up To Growth In Revpar, Crocker H. Liu Ph.D., Adam D. Nowak Ph.D., Robert M. White Jr.

Cornell Real Estate Market Indices

Hotel prices are not yet reflecting the positive momentum in RevPAR. However, we expect prices for hotel properties to rise in the next quarter based on our repeat sales index. A comparison of current operating yields relative to borrowing cost suggest that hotel investors expect most of investment performance to come from capital gains when the hotel is sold rather than operating performance. We also expect a further compression in hotel cap rates going forward. However, we anticipate positive price momentum to occur in smaller hotels with moderate increases (if any) for larger hotels based on our forward looking barometers ...


Fourth Quarter 2013: Flight To Quality: Big Trumps Small, Crocker H. Liu Ph.D., Adam D. Nowak Ph.D., Robert M. White Jr. Jan 2014

Fourth Quarter 2013: Flight To Quality: Big Trumps Small, Crocker H. Liu Ph.D., Adam D. Nowak Ph.D., Robert M. White Jr.

Cornell Real Estate Market Indices

A new hotel investment performance metric is introduced. Starting with this issue, we will apply our new economic value added (EVA) indicator as a barometer of hotel investment performance. Complete details of how to use this benchmark and why it is superior to evaluating cap rates relative to 10-year Treasury rates can be found in the recent publication from the Center for Hospitality Research and Center for Real Estate and Finance entitled “Using Economic Value Added (EVA) as a Barometer of Hotel Investment Performance,” by Matthew J. Clayton and Crocker H. Liu. Essentially, the hotel EVA spread tells us whether ...


Third Quarter 2013: Good Vibes (Nahenahe), Crocker H. Liu Ph.D., Adam D. Nowak Ph.D., Robert M. White Jr. Oct 2013

Third Quarter 2013: Good Vibes (Nahenahe), Crocker H. Liu Ph.D., Adam D. Nowak Ph.D., Robert M. White Jr.

Cornell Real Estate Market Indices

Our hotel real estate cycle analysis based on the repeat sales approach indicates that we will continue to experience an upward price momentum. This quarter, for the first time since the commercial real estate boom in 2004, all three of our price indices— large hotels, small hotels, and repeat sales of hotels— have positive price trends and are moving in the same direction. Hotel properties also exhibit a slight decline in the premium relative to other property types signaling that investors currently have lower perceived default risk for hotel properties. Our business confidence metric, along with the NAREIT Lodging/Resort ...


Second Quarter 2013: Where Are We In The Hotel Real Estate Cycle?, Crocker H. Liu Ph.D., Adam D. Nowak Ph.D., Robert M. White Jr. Jul 2013

Second Quarter 2013: Where Are We In The Hotel Real Estate Cycle?, Crocker H. Liu Ph.D., Adam D. Nowak Ph.D., Robert M. White Jr.

Cornell Real Estate Market Indices

We introduce a new tool in this issue to gauge where hotel prices are heading based on past hotel real estate cycles. Mixed signals exist and depend on the benchmark used. Cycle analysis based on the hedonic index indicates that we are approaching a peak in large hotel prices in contrast to the repeat sales approach, which indicates that we are still in the growth phase of the current hotel real estate cycle. In terms of the current quarter, a reversal has occurred in the Cornell Hotel Indices, with the price for larger hotels rising in the current quarter while ...