Hotels are becoming an increasingly attractive asset class for institutional investors. The number of hotel assets in the NCREIF Property Index (NPI) has been steadily increasing from six in 1982 to seventy in the second quarter of 2010. However, the hotel sector is still substantially under weighted in the NPI index with only $4.6 billion, or 1.9% in market value as of September 30, 2010.
There has been a rebound off the lows in lodging values but there remain headwinds. Hotel values are considered more volatile than other property types because of the short nature of the leases (room nights). Average daily room rates and occupancies can change quickly and are closely tied to GDP (gross domestic product) and the economic cycle.
Since September of 2009 the number of distressed commercial properties has risen 48% and the number of commercial foreclosures has increased 33% according to CoStar. Of the $62 billion in delinquent commercial mortgage backed securities approximately $9.4 billion are hotel securities according to Realpoint, a ratings firm.
Where commercial property values are in the real estate cycle depends on who you get your data from. If you are a typical retail owner you probably feel like we are barely off the floor and 2007 is a distant memory. There are two widely used indexes that track commercial property values. The Green Street CPPI index focuses on REIT portfolios and includes pending sales in its analysis of property value trends. This index shows we are up 35 percent since a low in 2007, and 15 percent below the peak. In contrast, Moody’s index relies on settled repeat sales of properties valued at over 2.5 million dollars. This index shows that we have recovered 5.5 percent after falling 42.1 percent from a peak in October 2007. Which index do you belong in?
Higher gasoline prices due to unrest in the Middle East threatens to shake the already challenged confidence of the consumer. Not-so-confident consumers don’t travel and that puts a damper on hotel occupancies. The facts that unemployment is still high and a high percentage of home mortgages are under water don’t help either.
At the 23rd annual Hunter Hotel Investment Conference recently they expressed slight concerns that not everything is rosy. Jan Freitag, VP of global business development for STR said: Given the strong demand growth (8% room demand growth in 2010), you would expect some life on the rate side but it hasn’t happened yet. Occupancy remains below 60% (58.7% in 2010) and developers consider 60% to be the magic number. Revenue per available room is down 13.8% from 2007. Average daily rate increases are lower than inflation, and every recession results in steeper rate discounts.
Going-in capitalization rates for first-tier (newer construction in prime to good) locations in Atlanta are 9.2% estimates Real Estate Research Corporation. Second-tier properties (aging, former first-tier properties, in good to average locations) show a range of cap rates from 7-13% in the South Region with an average going-in cap rate of 9.8%. Third-tier hotels in the South Region (older properties with functional inadequacies and/or marginal locations) show a range of going-in capitalization rates of 7-14% with an average of 10.5%.
Things did improve somewhat in 2010. Lender confidence improved and credit spreads declined. Commercial real estate values have generally stabilized. Low interest rates persisted throughout the year.
The outlook for the rest of 2011 is a mixed bag. Interest rates are still low and unemployment is trending down. However, interest rates have nowhere to go but up, and jobs are still scarce. Most homeowners have little or negative equity.
There are many reasons to appeal your property tax assessment in 2011. Even if the assessor has reduced your value in either of the prior two years you may be entitled to additional relief. Property tax rates may rise in response to the falling tax base. Do not let yourself be a victim of your own inaction. Let’s all save some money.
Get expert advice on Georgia commercial tax appeals. You can also get advice on Atlanta area residential property tax appeals and get professional advice from Fair Assessments, an Atlanta based property tax reduction company..