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Fourth Quarter 2019: 2019 Ends on a Whimper
Full text linkOnlyhotels in the New England region, and to a lesser extent the Midwest region, experienced a positive price momentum this quarter, although both regions suffered poor performance from a year-over-year perspective. Hotels located in gateway cities outperformed hotels in non-gateway cities. Hotel financial operating performance continued to post positive profit with operating profit exceeding both a hotel property’s operating costs and its financial (borrowing) cost based on economic value analysis (EVA). Although the price of large hotels increased in the fourth quarter (as compared to quarter three), the price of small hotels declined quarter to quarter, and the price of both large and small hotels fell on a year-over-year basis. It appears that the price of both types of hotels is reverting to their moving average. The cost of hotel debt financing remained flat this quarter, while the cost of equity financing declined. In terms of risk premiums, there was no change in the risk premium for hotels compared to the risk-free rate. Besides this, the relative risk premium that lenders require for hotels over and above other commercial real estate has narrowed, indicating that lenders aren’t demanding a higher compensation for originating hotel loans. However, the spread between the 10-year Treasury and the 3-month Treasury was flat in the current period, which continues to raise concerns over its impact on market liquidity as well as its contribution to slower price growth in hotels. A reading of our tea leaves suggests that large hotels should be expected to decline in price. In contrast, the price of smaller hotels is anticipated to rise. This is report number 33 of the index series
HOTVal Toolkit
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Scroll down to Additional Files to access the HOTVal Toolkit.
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HOTVal is a hotel valuation spreadsheet based on a regression model discussed in the Center for Real Estate and Finance at Cornell called Cornell Hotel Indices: Second Quarter 2012: The Trend is Our Friend by Crocker H. Liu, Adam D. Nowak, and Robert M. White, Jr. The model which will be continually updated, provides a rough estimation of the value of a hotel property once the user inputs information on whether the hotel is a large or small hotel, the year and quarter of the valuation, the state where the property is located, the number of rooms, the number of floors, the land area of the hotel property, the actual age of the hotel and whether the hotel is located in a Gateway city. For the first three inputs as well as the last input, if the user clicks on a cell highlighted in yellow, a pull down menu will appear to expedite inputting. The model is provided as a free public service by The Center for Real Estate and Finance at the School of Hotel Administration at Cornell University to academics and practitioners on an as-is, best-effort basis with no warranties or claims regarding its usefulness or implications. The estimates should be considered preliminary and subject to revision.
*This January 2020 version updates the previous Hotel Valuation model, originally published in 2012, and provides valuation estimates up to and including the fourth quarter of 2019
Do Dual-Branded Hotels Outperform Single-Branded Hotels?
Full text linkDual branding of hotels has become a growing industry practice. Beyond the potential marketing benefits of the dual-branding strategy, this paper tests whether dual-branded hotels operate more efficiently than comparable single-branded hotels (and therefore deliver better bottom-line results). Comparing a proprietary longitudinal data set on the operating performance generated by dual-branded hotels in the U.S. against a set of comparable single-branded hotels, we document mixed results. While dual- and single-branded hotels achieve similar occupancy percentages, dual-branded hotels generate higher average daily rate and revenue per available room. That said, dual-branded hotels have similar departmental expenses to those with a single brand. Although dual-brand hotels achieve some savings in undistributed expenses, for example, administrative and general (A&G) and maintenance, they incur higher IT and marketing expenses. As a result, gross operating profit margins are slightly lower in dual-branded hotels than in single-branded hotels. In sum, we document limited operating efficiency gains in dual-branded hotels compared to single-branded hotels. However, we recognize that the novelty of dual branding may mean that we need to allow more time to allow these hotels to achieve stabilized operation
First Quarter 2020: Gird Your Loins
Full text linkHotels in all regions experienced negative price momentum this quarter with hotels in the New England area having the worst price performance. Hotels located in gateway cities were especially hard hit. Hotel financial operating performance based on economic value analysis (EVA) has turned negative, indicating that hotel returns are coming primarily from future price appreciation. The prices of large and small hotels have both trended downwards toward their long run average from the perspective of our moving average trendlines and standardized unexpected price performance metrics. The cost of hotel debt financing has fallen this quarter while the cost of equity financing has increased, making it costlier to borrow equity capital. In terms of risk premiums, the risk premium for hotels has risen compared to the risk-free rate. Besides this, the relative risk premium that lenders require for hotels over and above other commercial real estate has also increased, indicating that lenders are demanding a higher compensation for originating hotel loans. A reading of our tea leaves suggests that both large and small hotels are expected to decline in price. This is report number 34 of the index series
Alumni Highlights: Ravikanth Pamidimukkala (Baker \u2717), RedSky Capital, LLC
No full textRavikanth (Ravi) Pamidimukkala is an Associate at RedSky Capital, LLC, in New York City. A 2017 graduate of Cornell’s Baker Program in Real Estate, Ravi interned with First Capital Real Estate Advisors, LP, during the program. Before joining the Baker Program, Ravi worked in ground-up development and acquisitions for mixed-use, luxury residential, and hospitality asset classes in South East Asia and India. He holds a Bachelor’s degree from the Indian Institute of Technology Kharagpur and a Master’s of Professional Studies at Cornell University
Analysis of Walkability Estimates and Hotel Real Estate Values in New York City
Full text linkThis study examines the relationship between walkability estimates including Walkscore and a 10-year sample of hotel transactions in New York City. Using a Hedonic pricing model, ordinary least squares (OLS) regression applied citywide initially produced significant positive relationships between walkability estimates and transaction value. However, the associations became more obscure once submarket fixed effects were introduced to control for unobserved differences between neighborhoods. More granular analysis of walking accessible destinations revealed that accessibility to certain destination categories like entertainment can have a negative impact on hotel value. The results suggest that builtenvironment pedestrian friendliness more consistently benefits hotel value compared to accessibility-based walking potential. This study also finds that while high value hotels are often found in areas with high walkability, hotel value premiums in these areas may not be attributable to walkability and can arise from other unobserved neighborhood characteristics. The study concludes by questioning the ability of current walkability estimates to accurately measure walking behavior of travelers
Characterizing Generation Z and its Implications to Booking Practices in the Hotel Industry
Full text linkIn an evaluation of preceding research, this study explores the characterization of Generation Z and, through a carefully designed questionnaire, its impact on consumer booking practices to prepare the hotel industry to better adapt to the incoming generation of travelers. Informed by the literature evaluated, the survey asks questions to (1) characterize the travel behavior of each participant, (2) ascertain the relative importance of multiple identified factors to their booking decision, and (3) characterize their individual profile. The results of this study illustrate the importance of price to the booking decision, over location, brand, online ratings, and amenities, reinforcing a concept recently introduced to the hospitality industry as “affordable luxury”
Enhancing Equipment Investment Decisions Using Equivalent Annual Cost
Full text linkFor any piece of equipment or system required to operate a hospitality business, there are typically many available choices that would perform various required functions. But while any of those machines may do a particular job, they are likely to differ in ways that make selection complicated. For example, some commercial ice machines are air-cooled while others are water-cooled. Both make ice, of course, but the purchase decision involves contrasting considerations. Air-cooled machines are less expensive upfront, but they have higher annual operating costs. On the other hand, water-cooled machines are more expensive upfront, while presenting lower annual operating costs. Beyond that, the two types of ice machine may have different expected useful lives. In combination, these factors (as well as possible external considerations) make it complicated to determine the most cost-effective choice
Where, When and How Do Sophisticated Investor Respond to Flood Risk?
No full textWhile the empirical evidence on the pricing of flood risk exposure in residential real estate held by uninformed households is mixed, this study shows that sophisticated investors in commercial real estate markets rationally respond to heightened flood risk by bidding down the prices of exposed assets. Using a detailed property-level database on commercial real estate transactions completed in New York, Boston, and Chicago before and after the shift in the salience of flood risk caused by Hurricane Sandy, we document that properties exposed to flood risk experience slower price appreciation after the storm than equivalent unexposed properties. We further show that: the price effect is not driven by physical damage incurred from Hurricane Sandy, nor by concurrent unrelated pricing trends for waterfront property; it persists through time, suggesting it does not reflect a temporary overreaction that is subsequently reversed; it is driven by higher risk premiums for exposed properties; and it is exacerbated by contagion from locally important occupiers
The Rate of Return on Real Estate: Long-Run Micro-Level Evidence
No full textWe provide evidence that direct real estate investments are less profitable and more risky in the long run than previously thought. We hand-collect property-level data on realized income, expenses, and transaction prices from the archives of four large institutional investors in the U.K.—historically important Oxbridge colleges—for the period 1901–1970. Gross income yields mostly fluctuate around 5%, but trend to lower (higher) levels for agricultural and residential (commercial) real estate near the end of our sample period. Operating costs mean that net yields are about one third lower than gross yields on average. Long-term real income growth rates are between -1.0% and 0.0% for the three main property types. Together these findings imply limited long-run capital gains and real annualized net total returns of less than 4% across all property types. Moreover, we find substantial volatility in net income streams and variation in relative price levels across transacted properties, revealing the considerable idiosyncratic risks associated with real estate investments