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RERC © REAL ESTATE REPORT - THE NATIONAL REAL ESTATE AUTHORITY
HOTEL
n According to RERC’s fourth quarter 2011 institutional investment
survey respondents, the hotel sector remains the riskiest
option when compared to the other property sectors. Nevertheless,
some respondents noted that hotel properties are
undercapitalized and that the sector will track GDP growth for
business travel and conference bookings.
n RERC’s investment conditions rating for the hotel sector
declined to 6.0 on a scale of 1 to 10, with 10 being high, during
fourth quarter 2011. Although the rating was still above the
midpoint of the rating scale, the further decline of the hotel
sector indicates that the investment potential of this sector
has diminished.
n After declining the previous quarter, RERC’s required pre-tax
yield rate for the hotel sector increased to 10.6 percent and
remained the highest rating among the property sectors
during fourth quarter 2011. In addition, the required going-in
capitalization rate for the hotel sector declined to 8.2 percent,
while the required terminal capitalization rate for the hotel
sector increased to 9.0 percent.
n RERC’s expected rental growth for the hotel sector increased
to 3.5 percent during fourth quarter 2011. In contrast, the
expected expense growth for the hotel sector remained
unchanged at 3.0 percent. The hotel sector continued to
receive the highest expected rental and expense growth rates
compared to the other property sectors.
n Although hotel sector occupancy and revenue per available
room (RevPAR) declined significantly during fourth quarter
2011 compared to the previous quarter, according to Smith
Travel Research, occupancy rose 3.4 percent to 49.0 percent
compared to a year ago. Likewise, the average daily rate (ADR)
increased 1.3 percent to $107.14, and RevPAR rose 7.8 percent
to $51.69 during fourth quarter 2011.
24 WWW.RERC.COM
RERC Risk & Return Analysis - 4Q 2011
10-Year Average Returns
4-Quarter Rolling
Returns
NCREIF Returns 6.73% 11.80%
NCREIF St. Dev. 14.03% 14.03%
RAR* Metric 0.5 0.8
RERC Returns 11.48% 10.58%
NCREIF vs. RERC -4.75% 1.22%
*RAR = Risk-Adjusted Returns.
Sources: RERC, NCREIF.
RERC Hotel Performance Cycle
Real Difference* (Percent)
15
10
5
0
-5
-10
-15
-20
-25
-30
-35
-40
-45
4Q 2001
4Q 2002
Market Equilibrium
Hotel
4Q 2003
4Q 2004
4Q 2005
4Q 2006
4Q 2007
Sources: RERC, NCREIF, 4Q 2011.
*Difference between NCREIF realized and RERC required returns.
Hotel Investment Criteria Trends
Percent
15
12
9
6
Source: RERC, 4Q 2011.
WINTER 2012 | VOL 40 | NO 4
4Q 2008
4Q 2009
4Q 2010
4Q 2011
Terminal Cap Rate
Going-In Cap Rate
Pre-Tax Yield
4Q 2001
4Q 2002
4Q 2003
4Q 2004
4Q 2005
4Q 2006
4Q 2007
4Q 2008
4Q 2009
4Q 2010
4Q 2011
© 2012 REAL ESTATE RESEARCH CORPORATION. ALL RIGHTS RESERVED.
15
10
5
0
-5
-10
-15
-20
-25
-30
-35
-40
-45
15
12
9
6