Hotel fundamentals have gotten up off of the floor although the economics are somewhat spotty. The state of the U.S. economy has some market participants remaining cautious, but most believe that the economy will continue to strengthen in the second half of the year. Supply and demand fundamentals are good in many markets and revenue per available room is expected to increase 8% according to Smith Travel Research, and should continue to grow at the same rate in 2012.
Capitalization rates, or the return to the investor based on the purchase price and net operating income, have fallen through 2010. This is primarily due to the fact that the sold properties are mostly "trophy" assets in major metropolitan areas. If sales activity picks up in the rest of the market, capitalization rates could rise even as property economics are improving. The capitalization rate is the ratio of income to value, and if income is rising faster than values, capitalization rates rise.
In addition, expectations of higher inflation and interest rates will also put upward pressure on capitalization rates as the risk free rate of return (U.S. Treasuries) rises. It has been surprising how quickly capitalization rates have dropped since the end of the "great recession." They have dropped too far and too fast as some publications that don't differentiate between the "trophy" market and everything else paint a rosy picture. I would like to see more sales of all types of income producing properties from various sub-markets so we can get a "real" indication of where capitalization rates are.
Capitalization rates, or the return to the investor based on the purchase price and net operating income, have fallen through 2010. This is primarily due to the fact that the sold properties are mostly "trophy" assets in major metropolitan areas. If sales activity picks up in the rest of the market, capitalization rates could rise even as property economics are improving. The capitalization rate is the ratio of income to value, and if income is rising faster than values, capitalization rates rise.
In addition, expectations of higher inflation and interest rates will also put upward pressure on capitalization rates as the risk free rate of return (U.S. Treasuries) rises. It has been surprising how quickly capitalization rates have dropped since the end of the "great recession." They have dropped too far and too fast as some publications that don't differentiate between the "trophy" market and everything else paint a rosy picture. I would like to see more sales of all types of income producing properties from various sub-markets so we can get a "real" indication of where capitalization rates are.
