Between January and August of '08, Kansas City, MO-based HBI tracked 216 public transactions versus 582 in the same period a year earlier. Furthermore, the average deal size slipped from 199 rooms to 167, while the average price per room dropped to $108,000 from $120,000. Total volume tallied for the first three quarters reached $6.4 billion compared to $17.4 billion.

At the same time, HBI members recorded 57 deals compared to 118 for the first three quarters of 2007. Cap rates for those deals inched down to 8.67% from 9.17%, which is statistically insignificant. However, loan amounts have changed. First mortgage LTV came in most recently at 71% with a 7.2% average first-year interest rate. In the prior three-quarter period, the LTV was 74.5% with a first-year interest rate of 8%.

H. Brandt Niehaus, president of HBI and Huff, Niehaus & Associates Inc. in Louisville, says transaction volume is down because buyers and sellers remain far apart on price. "The majority of our industry is still making excellent profit," he says. "Because hotels are still profitable there isn't enough motivation to put properties onto the market."

Even properties in parts of the country hit hardest by the economic downturn, such as Michigan, are performing reasonably well. "The buyer is worried about how much worse it will get, so therefore he wants a discount," Niehaus explains. "But the seller says, 'Why should I discount it? It hasn't changed that much for me yet.' And that's the biggest reason we've had a lack of transactions is that buyer and seller can't come together."

Rob Koger, president of Molinaro Koger, a hotel brokerage firm based in Washington, DC, concurs that transaction volume for lodging properties has slowed. "There are not a lot of transactions occurring, and those that are occurring are being completed by all-cash buyers looking for good assets that are providing a strong yield," he says. "It's a function of the credit markets as well as concern about the overall economy."

Those deals that are being transacted are primarily single-asset trades under $25 million, Koger relates. "There are larger deals getting done, but they are not getting done with regularity," he says. "There are not many trophy assets on the market at this time. With the credit markets being tight, deals that have financing in place or that have seller financing have a much stronger chance of getting done in this environment."

In October, Molinaro Koger brokered the sale of the Hyatt Regency Orange County in Garden Grove, CA to Inland American Lodging Advisor Inc. Ashford Hospitality Trust was the seller. According to CB Richard Ellis, the 654-key property sold for $112 million. "It was good asset in a strong market with good cash flow, so it garnered pretty strong interest," recalls Koger.

Niehaus expects Q1 to witness a depressed transaction marketplace, but the pace should pick up as the year progresses. "It's going to be slow because there isn't enough in the pipeline for the first quarter to be anything real dramatic," he says. "But by the end of the first quarter, you will see evidence that the lenders are back into the game—they have to lend. So they are looking for deals to lend on and there's been a number that have been on hold. Then in the second quarter you are going to get some activity of people who have gone through the winter and it's been tougher than they thought and they get motivated to sell. So they get their properties on the market second quarter and hopefully get it closed second or third quarter."

At the same, buyers may be looking to buy in anticipation of an upswing in 2010. "You will begin to see buyers out there saying, 'I better buy now before prices go up.' So come third or fourth quarter they are going to be looking to buy," Niehaus says. "That's what could happen, but as with most forecasting you can probably add a quarter onto that, because I think it's going to take longer for people to get that positive. It's more likely it will be mid-2010 before we see things back to normal."

Koger is "optimistic" volume will pick up by midyear. "Our view is it can't get worse," he says. "It's been a slow year. We've been able to get a number of deals done, but certainly nowhere near the volume of 2006 and 2007. But we anticipate that changing toward the latter half of 2009 and look forward to participating in the market recovery as the market comes back."

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Hotel Sales Drop in 2008; Expect More of the Same

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