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CRE Finance World, Winter 2012

Lodging Sector in CMBS: Outlook for 2012 Figure 3 …but is partly offset by a lack of new supply Cap rate and valuations per key On the other hand, new supply entering the lodging market remains low, stuck below 1% and consistently declining since 2008 (Figure 1). Given macroeconomic uncertainty, we do not expect a spike in new lodging construction. As such, a slowdown in the growth of overall lodging stock could provide some support to performance, despite the expected slowdown in demand. RevPAR and occupancy could face some pressure Hotel performance, measured in revenue per available room (or RevPAR) sharply declined in 2009 (Figure 2): at the trough of the cycle in May 2009, RevPAR was down 20% year on year, while occupancy dropped to 56%. Since then, however, the sector has enjoyed a strong recovery with RevPAR growing at 10% and occupancy back at above 63% Although RevPAR and occupancy remain closely correlated, occupancy rates are a somewhat leading indicator (typically, by a few months). Most industry experts expect cooling demand to keep Note: Price per key includes both limited and full service properties. Source: Real Capital RevPAR growth in the mid-to-high single digits in the near term, Analytics, Barclays Capital significantly lower than the 10% growth in 2010. This implies that Figure 4 occupancy is expected to stay flat to slightly higher year on year. Hotel buyers over the past 24 months ($bn) Valuations have improved driven by strong REIT demand The lodging sector experienced significant gains in valuations in 2011, driven by not only improving performance, but also a significant decline in cap rates. As Figure 3 shows, those in the lodging sector fell from close to 10.0% in 2010 to about 7.3% in Q3 11. Valuations were supported by strong demand from REITs and equity funds (Figure 4), which, in turn, raised considerable funds through equity and debt offerings in 2010. In our view, the steep compression in cap rates has been a bigger contributor to property valuation increases (rather than the perfor- mance improvements through RevPAR). This has pushed prices on hotel properties to their highest level since 2005, at close to $170,000 per key. In 2012, we expect this disconnect between annual changes in valuation and changes in RevPAR to ease, as slowing performance growth, coupled with weaker REIT demand (and, possibly, even Note: REOC is Real Estate Operating Company. Source: Real Capital Analytics, Barclays Capital dispositions of non-core lodging assets), will begin to put upward pressure on cap rates. In addition, it is more difficult now for other CRE Finance World Winter 2012 50


CRE Finance World, Winter 2012
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