How to Determine the Future Direction of Hotel Capitalization Rates

[Excerpt] For many in the hotel industry, the ratio of property-level operating income and asset market pricing - the capitalization or ‘cap’ rate – provides an important foundation for rational investing and financing decisions. During periods, such as the recent past, when both the numerator and denominator of the ratio experience different magnitudes of movement, hotel cap rate interpretations become especially difficult for all in the industry. As the markets for hotel room sales now appear headed toward more stability, hopes are rising that the wide bid/ask spreads now in the hotel asset market will narrow, leading to more normal transaction volume and returning property development to pre-2001 levels. The topic addressed in this article is the near-term direction of hotel cap rates. If the rate increases, then the pace of property transaction activity and development will be slower than if rates decline. Based on the conceptual arguments presented below, the probability of hotel cap rates declining in the short run exceeds the probability of rates increasing.Corgel14_How_to_determine_future.pdf: 433 downloads, before Aug. 1, 2020