Other real estate "rules of the road": look under cap-rate rocks; watch out for unexpected motivations
A new report from the Cornell Center for Hospitality Research presents eight “rules of the road” for hotel developers—but sometimes the road takes an unexpected turn. For example, the connection between hotel gross operating profits (or losses) and property values is not as solid as investors or property managers might think.
In the report “Eight Rules for Competing in Hotel Real Estate Markets,” Professor John B. (Jack) Corgel compiles and analyzes the results of several studies using his own research, as well as other studies and data collected by such firms as Smith Travel Research, Torto Wheaton, and PKF Consulting. The report is available at the bottom of this article.
“In comparing the changes in ADR and occupancy to changes in property valuation, I came up with the “tale of two cities” concept,” Corgel said. “ADR and occupancy are not always concurrently related to real estate values, because interest rates and other capital market forces also factor into valuation.”
With regard to overbuilding, Corgel presents a detailed examination of the hotel industry’s construction cycle. He notes that it has been nearly 20 years since the industry has experienced the abnormal supply growth that harkens back to the 1980s. Moreover, when demand began to weaken in 2000, Corgel points out that the supply side of the commercial real estate markets remained disciplined, rather than succumb to the temptation of overbuilding.
“My report benefits greatly from the fact that we now have systematic data that document the hotel markets’ behavior through more than one complete market cycle,” said Corgel, who is the Robert C. Baker Professor of Real Estate Management at the Cornell Hotel School. “Additionally, we have firm statistics showing how the market reacted through the wide variety of environmental conditions of the past 15 years.”
Here are some other “rules of the road.” Industry practitioners and observers are familiar with the fact that the hotel industry is cyclical and that those cycles are subject to various types of time lags. However, Corgel warns that the lags don’t always operate as advertised. Another “rule” is to look under the rocks covering hotel cap rates, because they can move quickly and without warning. An unexpected “rule” is that the use of floating interest rates are more appropriate for hotel projects than many borrowers might think.
“Here’s one last ‘rule’ that you must never forget,” Corgel warns. “People can mess things up! When it comes to hotel property valuation, you always have to look at the motivations of individual buyers and sellers, because any pair of buyers and sellers can overprice or underprice assets according to their own perceptions.”
About The Center for Hospitality Research | A unit of the Cornell School of Hotel Administration, The Center for Hospitality Research (CHR) sponsors research designed to improve practices in the hospitality industry. Under the lead of the Center’s 43 corporate affiliates, experienced scholars work closely with business executives to discover new insights into strategic, managerial and operating practices. The Center also publishes the award-winning hospitality journal, the Cornell Hotel and Restaurant Administration Quarterly. To learn more about CHR and its projects, visit www.thecenterforhospitalityresearch.org
CHR Partners and sponsors: AIG Global Real Estate Investment Corp., Cendant Corporation, Four Seasons Hotels and Resorts, HVS International, JohnsonDiversey, Inc., Kohinoor Group, Marsh’s Hospitality Practice, Nestlé, Smith Travel Research, Southern Wine and Spirits of America, Inc., SynXis Corporation of Sabre Holdings, Taj Hotels Resorts and Palaces, and Thayer Group of Companies.
CHR friends: ARAMARK • DK Shifflet & Associates • ehotelier.com • Estrela Marketing Solutions • Fireman's Fund • Gerencia de Hoteles & Restaurantes • Global Hospitality Resources • hospitalitynet.org • Hotel Asia Pacific • Hotel China • Hospitality Initiatives India • Hotel Interactive • Hotel Resource • International CHRIE • International Hotel and Restaurant Association • KPMG Japan/Global Management Directions • Lodging Hospitality • Lodging Magazine • Mobile MoneySaver • National Hotel Executive Magazine • PKF Hospitality Research • Resort+Recreation • The Resort Trades • RestaurantEdge.com • Shibata Publishing Co. • The Lodging Conference • Taste & Travel • TravelCLICK • UniFocus •Vanguard Foundation • WageWatch, Inc. • WiredHotelier.com