Aeppel LOEWS HOTELS

National Report–In the past several months, the credit crisis and economic recession have made headlines almost daily, and recent studies by HVS and PKF Hospitality Research show that capitalization rates are on the upswing, which could signify troubling times for the lodging industry.

The Hospitality Investment Survey, published by PKF Hospitality Research and PKF Consulting, reported that hotel cap rates, which measure the ratio between the net income an asset produces and its selling price, rose from 9.13 percent in 2007 to 9.43 percent in 2008.

Overall capitalization rates (percentage)

The lending environment, namely the availability and cost of capital and the lack of liquidity in the market, bears the brunt as the reason for increased cap rates. Other drivers include supply and demand for deals, according to Glyn Aeppel, executive v.p., acquisitions and development, Loews Hotels.

In previous years, cap rates were at an all-time low, with 2006 at 8.89 percent.

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"What that was, was basically really inexpensive debt, very readily available debt and very high-leverage debt, combined with a good amount of private equity or equity dollars competing for sales," said Bob Eaton, executive managing director, PKF Capital. "It's turning back up because that debt has become largely more conservative in its underwriting and the loan-to-value ratios in the debt markets are much more conservative, more like 65 percent rather than 80 percent."

That conservativeness has extended to availability of capital.

"Wall Street money has become dramatically more difficult to obtain. That in and of itself helps drive cap rates up," said Peter Holmes, c.o.o. of HotelBrokerOne. "Once it becomes more difficult to obtain the financing, even if the financing doesn't cost more to obtain, the difficulty factor leads to the perception that the market is in trouble."

Questionable future

Eaton PKF CAPITAL

Just as whether the U.S. economy is in a recession or not is disputed, the health of the hospitality industry also can be disputed. Fundamentals of the industry, such as average daily rate and revenue per available room, still are anticipated to grow, but not at previous rates. According to Smith Travel Research, the first 60 days of 2008 saw a 3.2-percent RevPAR gain—a marked decrease from 2007 year-end numbers that pegged RevPAR at 5.7 percent—and a 5-percent boost in ADR, which is lower than last year's 5.9 percent. Some statistics, such as occupancy, already have shown a decline: STR's numbers put occupancy down 1.7 percent in the first two months of 2008.

Supply and demand factors, however, remain relatively strong: PKF predicted supply in 2008 will increase 2.9 percent over 2007, and demand will increase 0.9 percent from last year.

Cap rates, while on the increase, are at the third-lowest rate since PKF's survey started in 1995. In 2005, cap rates fell below 10 percent for the first time since the survey's inception. Its rise, however, still might cause concern and have an impact on the industry.