Article of The Week:
by David Eisen?| www.hotelsmag.com |?November 15, 2024
Hotel investment risk has normalized. That’s good news. Here’s why.
Like all capital market rates, hotel cap rates and mortgage interest rates rose hundreds of basis points in the wake of the pandemic to levels not seen in years. During periods of systematic increases in rates and elevated investment uncertainty, spreads between capital market rates provide useful information not found in rate levels. Specifically, they isolate risk premiums, which guide investors in committing capital to different types of investments.
Hotel rate spreads compressed during 2023 and first-quarter 2024. Both hotel cap rate and mortgage interest rate spreads to 10-year Treasuries and other assets of similar risk returned to near or below first-quarter 2019 levels. These market indicators signal to investors that relative pricing of hotels has normalized.
Hotel Cap Rate Spreads
A recent CBRE report presents data confirming that hotel cap rates consistently track higher than those of other CRE property types (i.e., industrial, multifamily, office and retail) through time. In addition, all CRE cap rates are shown to be highly correlated; however, correlations of hotel cap rates with those of other CRE break down during periods of distress.?
Data from CBRE Hotels Research and Econometric Advisors allow for an examination of spreads between hotels and other CRE cap rates since 2001 (see Figure 1). The widening of hotel cap rate spreads is apparent during the two periods of financial distress this century—the financial crisis during 2008-2009 and the COVID pandemic during 2020-2021. Since 2022, spreads tightened to the level recorded in 2019 (i.e., just under 4.00%). During Q1 2024 the spread was 2.44% or about 50 basis points below the series long run average. The trend implies further tightening.
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