While office, industrial, retail and apartment properties faced a single significant recession since 2000, hotel properties have endured two. Hotel’s first recession in 2001 was driven by the tragic events of 911 when business and personal travel all but disappeared.
Since 2000, the average annual return for hotel properties held in tax-free investment portfolios (both cash flow and property value changes) has been 6.44 percent. The latest 12-months return was 7.48 percent.
The data for this analysis comes from the National Council of Real Estate Investment Fiduciaries (NCREIF), which is a non-profit trade association for tax-exempt investors (such as pension funds) in real estate managed by fiduciaries. NCREIF reports accurate, unbiased return metrics, with a framework in place that assures consistency over time and across investors. To read more about NCREIF click http://www.ncreif.org/index.aspx
NCREIF’s return assumptions include:
- Properties are acquired through all-cash transaction (no loans)
- Since the returns are within tax-free investments, no taxes are paid (except property taxes). There are no long-term gains taxed at the time of sale, and the investors do not depreciate the property.
- Returns are calculated quarterly and include both the net-cash flow from the property and the change in the property value. Specifically, total return is the net operating income from the property, less property management fees, plus the change in value.
For details and related questions click http://www.ncreif.org/faqsproperty.aspx
Within the NCREIF space, more than 7,000 commercial properties are tracked with a combined market value of $353.9 billion. This data series is recognized as a top proxy for U.S. commercial real estate returns and performance.
The annualized trailing 12-month hotel returns are included in the following table since 2000, and in the graph commencing 2002.
I do believe that the future of hotel property performance is very positive. Supporting that is the current employment trend in accommodations employment, which is once again approaching a record level reached in 2000. The graph includes a yellow bar indicating when the U.S. was in a recession. Jobs are expressed on a seasonally-adjusted basis. As you can see, recessions are devastating to accommodations industry employment, and correspondingly, to hotel property returns.
Coming up in the next blog –the best for last, retail property returns.
If any questions arise, just reply back.