Average Hotel Market Up-cycle Lasts Almost Seven Years

• 
  SAVE
• 
  SHARE
• 
  TEXT SIZE
• 
  PRINT
• 
  COMMENT
• 
  PDF

. October 14, 2008

FEBRUARY 20, 2007. The average hotel market up-cycle lasts 6.7 years according to the results of a study conducted by Hotel Investment Strategies LLC, a lodging investment advisory firm based in New York.

The Principal of the firm, Mr. Ross Woods, said that the study of 50 full-service hotel markets over the past twenty years revealed that the up-cycle has varied between 3 years in the case of Indianapolis and Honolulu to 11 years in the case of Dallas and Houston but averaged 6.7 years overall. About 70% of markets experienced an up-cycle of between 4.8 and 8.6 years.

Mr. Woods said that at the end 2006 about three-quarters of full-service hotel markets were in the up-cycle, 35% in the recovery phase and 40% in the expansion phase. This compares with 44% that were in the recovery phase and 21% that were in the expansion phase of the up-cycle in 2005.

'The opportunity to exploit cycles is based on our capacity to perceive events as susceptible to repetition. While hotel cycles are not expected to repeat themselves in exactly the same way as they did before, they never-the-less provide astute investors with significant insight and timing for investment decisions,' said Mr. Woods.

'The exact location of a hotel market on its cycle has important pricing implications. Over the past decade it would appear that many hotel investors have not built the obvious cycle into their forecasts of cash flows and have overvalued hotels at the peak of the market and undervalued hotels at cyclical troughs.'

The research shows that over the twenty year period 1987- 2006, rational market timing strategies for acquisitions and dispositions made a substantial difference in long-term returns as compared to a simple buy and hold strategy.

'Many real estate investors do not participate in the hotel sector because they see it as a sector that is appropriate only for long-term holds of five to ten years, and many investors that do participate, believe that hotel real estate is to be held, and held,' said Mr. Woods. 'Our analysis reveals that market timing, even if executed less than perfectly and with high transaction fees, would have raised returns in most of the markets throughout the country.'

Mr. Woods said that timing the market was one of the most important factors contributing to hotel investment success. 'Location in and of itself cannot protect an investor from buying at the top of a cycle and taking a loss on the way down. Timing and location are not mutually exclusive. Instead, they naturally complement each other.'

'Similarly, an excellent hotel product in and of itself cannot protect an investor from buying at the top of a cycle and taking a loss on the way down. Improving hotel properties and adding value, just like picking great locations or selecting an excellent hotel product, can fail without good timing,' said Mr. Woods.

With much discussion about how long the present upturn in the lodging industry is going to last he cautioned investors to look beyond the national cycle. 'Most commentators thought the industry last peaked in 2000. This was the case if we only examined national data, but an analysis of over 50 full-service hotel markets reveals that only about 21% peaked in 2000. About 52% of full-service hotel markets had already peaked in the five year period leading up to 2000.'

Rarely are investors able to forecast the exact turning points in the cycle, but they now have the means to determine the likelihood of troughs and peaks and therefore increase their odds of success. Investors can now gauge the probability of hotel markets falling below their previous cyclical highs or lows.

'Hotel investors seeking 'stabilized' hotels are deluding themselves,' said Mr. Woods. The lodging industry is most often in a state of disequilibrium and has reverted to the mean about 14% of the time over the past 35 years.

'Hotel investment strategies that explicitly account for hotel market cycles at the individual hotel level are likely to provide the highest risk-adjusted returns for hotel investors,' according to Mr. Woods.