Since many will be heading out the door this afternoon to enjoy a three-day weekend, let’s talk about hotel property performance, the third installment in the commercial real estate returns series.
So where do we get the data?
The National Council of Real Estate Investment Fiduciaries (NCREIF) is a non-profit trade association for tax-exempt investors (such as pension funds) in real estate managed by fiduciaries. They report accurate, unbiased real estate return data. NCREIF employs a framework of reporting requirements assuring consistency in return analyses.
One of the many data series provided is the NCREIF Property Returns Index reporting quarterly performance for more than 7,200 commercial properties having a combined value in excess of $310 billion. This series is perhaps the best proxy for U.S. commercial real estate performance. For hotels, data commencing Q2 1988 can be viewed here.
This series from NCREIF includes both cash flow and property value change for the quarter. Assumptions include (and for more details click here) :
- Each quarterly return assumes the property was purchased at the beginning of the quarter and sold at the end of the quarter with all cash flow going to the investor (Net Operating Income – Capital Expenditures)
- Properties are purchased with cash—no loans
- There are no depreciation schedules for tax purposes (tax-exempt investments), nor any capital gains tax implications
Since 2000, the average trailing twelve months (TTM) return on hotel properties was 6.3 percent. This includes both the net operating income after deducting property management fees plus value change. The table shows the trailing 12-month returns for hotel properties held in NCREF-member investments. Unlike other commercial properties, hotels not only had the liquidity issues during the recession in 2008-2009, but also a loss associated with the tragedy of 911.
The graph below shows this return on a TTM basis.
The annualized return on a TTM basis in the latest quarter was 7.74 percent—a 22+ percent improvement over the average calculated since Q1 2000.
Good news for the industry is that the U.S. Leisure and Hospitality segment, now has more employees than ever in history. That will show up in increasing revenue per available room (REVPAR). The following graph shows both the 911 impact and the significant drop in the 2008-2009 recession.
If you have questions—just email back.