Cornell Hotel Indices Series Opens Window into Hotel Asset Values

For over two years, the Cornell Real Estate Market Indices series has documented the shifting tides of hotel asset values and sales in the United States. Now in its ninth edition, the indices series provides a much-needed quarterly window on price changes and asset values for U.S. hotels, both large and small. The latest report, covering the fourth quarter of 2013, documents continued price appreciation for large hotels, while the price index for small hotels diverged and demonstrated a downward trend. The downward trend was also evident for repeat hotel sales.

Three indices are featured in each report: a large-hotel index, for property sales over $10 million; a small property index, for deals under that level; and a repeat-sale index, for properties that allow before-and-after price comparisons. Data are supplied by CoStar and Real Capital Analytics. The reports compare the statistics for hotels to those for other commercial real estate, as well as other indices, such as architecture billings and consumer and business confidence.

Created by Crocker H. Liu, Adam D. Nowak, and Robert M. White, Jr., the indices series also offers a perspective on the larger economic picture. Liu is the Robert A. Beck Professor of Hospitality Financial Management at the Cornell School of Hotel Administration, Nowak is an assistant professor at West Virginia University, and White is founder and president of Real Capital Analytics.

The reports are accompanied by a spreadsheet tool, the Hotel Valuation Model (HOTVAL), which allows investors to estimate their value of their hotel assets by inputting such information as the size and location of the hotel, the number of rooms, and the amount of real estate.

The authors report that their analysis for the fourth quarter of 2013 shows what they termed a flight to quality, with a renewed focus on large hotels. Another trend highlighted in the report is an indication that investors have an increased perceptions of default risk for hotels, as shown by the increased premium on hotel transactions. At the time of publication, the trends indicated continued price momentum for large hotels, and a recovery in prices of small hotels.

The most recent indices report also introduced the use of economic value added analysis (EVA), which provides another barometer of hotels’ investment performance. EVA is explained in greater detail in a report jointly issued the Center for Real Estate and Finance and the Center for Hospitality Research, “Using Economic Value Added (EVA) as a Barometer of Hotel Investment Performance", by Matthew J. Clayton and Crocker H. Liu. Clayton is an associate professor and the Stone Family Faculty Fellow at the Cornell School of Hotel Administration. One key feature of EVA over the more typical investment measure of cap rate spread is that EVA incorporates investors’ risk premium as part of the calculation. As explained in the fourth quarter indices report, the researchers found that EVA has generally been negative or near zero for hotels, indicating that investors expect to make their money on hotel deals from price appreciation when they sell.

The next Cornell Indices report, covering the first quarter of 2014, will be available in April.