Hotels Starting to Show Signs of Recovery.

One property type that is seeing its prospects improve with the economy, after a pronounced downslide in the last few years, is hotel property. The hotel sector has been especially impacted in the recent economic downturn by the drop-off in travel following 9/11, the general impact of the downturn and, just when the effect of that was beginning to wear off, war in Iraq and the SARS scare.

However, hotels are now reporting improved occupancies and revenue. For the third quarter, some major real estate investment trusts, including Bethesda, Md.-based Host Marriott and LaSalle Hotel Properties, have seen their earnings rise.

At the Urban Land Institute's recent fall meeting in New York, Stephen Rushmore, president, HVS International, Mineola, N.Y., noted at a panel session on the lodging industry that the hotel sector, which had seen a significant run-up in value during the period 1992 to 2000, saw values go down after 9/11. However, the drop-off had leveled off in 2003, and he expects a "very strong increase in value" by the end of this year. In the recovery that is taking place, Mr. Rushmore expects that an increase in room rates and financial and operating leverage for hotel properties will lead to an increase in value for the sector.

Risk to the sector is more on the supply side rather than the demand side and he doesn't expect hotel properties to be impacted by oversupply in the near future.

For a typical hotel in the U.S., he is expecting a change in value per room of $55,000 over the period 2003 to 2006, with New York, Oahu and Washington on the top of the list of hotel markets that will gain in value. Cities at the bottom of this list include New Orleans, Chicago, Cincinnati, Detroit and other cities in the "Rust Belt."

A "high watermark" for hotel values was in 2000, Mr. Rushmore said, and he expects the typical hotel to recover to its 2000 value by next year.

In terms of volatility of different hotel markets, based on how likely it is that values will change, for the U.S. as a whole it is 18%. The markets that are least volatile are Sacramento, Calif., and San Antonio at 11% each. Mr. Rushmore recommends investing in hotel markets that have a combination of low volatility and large increases in value.