ATLANTA—Hotel profits are up. Debt is more available. Cap rates are stable. And values are expected to rise in the near-term. That's the story from PKF Consulting (PKFC). The firm just released its annual Hospitality Investment Survey, which tracks changes in hotel investment and financing criteria for the past 12 months.

“With supply growth forecast to remain below the long-run average, the outlook for exceptional returns on hotel investments appears to be positive,” says Scott Smith, vice president in PKFC's Atlanta office. “The only outstanding question among the respondents to our survey is 'how long can the industry maintain this peak performance?'”

So what's driving all the optimism? The strong outlook for major hotel metrics. According to the June 2014 edition of PKF Hospitality Research's Hotel Horizon's report, supply growth is expected to remain below the 1.9% long-run average through 2016 and increase to 2.1% in 2017.

The report also forecasts this modest growth will drive strong hotel occupancy and allow hotel operators to raise average daily rates. All that equals healthy revenue per available room (RevPAR) growth through 2016.

What's more, the report revealed hotel property level net operating income (NOI) increased 10.1% for the typical US hotel in 2013. That's just below the 2012 year-over-year increase of 10.2%. Double-digit annual NOI gains are forecast to persist through 2015.

“Many survey respondents indicated that owners are holding on to high yielding assets as the outlook for NOI growth remains strong,” Smith says. “As a result, there are a limited number of hotels available for purchase. This has created a competitive environment for buyers, effectively driving up pricing.  In response, some investors are now targeting alternative asset classes (i.e. select service, extended stay) or focusing on secondary and tertiary markets.”

Turning to the investment front, PKFC says “vast majority” of investors remain “bullish” on the near-term outlook for hotel investing. A positive NOI outlook is causing a slight dip in cap rates for hotels.

At 8.27%, we're seeing the lowest cap rate recorded since the firm launched its survey. There was virtually no change in discount rates, terminal cap rates or equity yields year-over-year. Smith says, “In our opinion, this displays the comfort level that many market participants have with the current investment environment.”

The average, expected, cash-on-cash return for a hotel investment increased by nearly 1% in 2014. PKFC called it yet another indication of strong income growth expectations, which helps explain the slight increase in the equity yield.

Finally, survey respondents indicated that the average holding period for assets has increased by approximately six months. Smith says, “Many investors are holding on to well-performing assets a little longer.”

One noteworthy aspect of the survey explores hotel investor favorites. It turns out
luxury hotels and boutique properties continue to be underwritten on lower cap rates compared to typical, full-service hotels.  

“Owners have greater flexibility with these types of assets when completing a repositioning or value enhancement project,” says Smith. “In addition, these categories are heavily weighted by properties located in gateway cities such as New York and San Francisco.”

Depending on the age of the asset, capitalization rates for full-service hotels continue to vary widely, according to the report. Full-service hotels less than 15 years old had an average cap rate of 80 basis points less than hotels 16 years or older. Limited-service cap rates follow a similar trend with regards to the age of the asset.

PKFC concludes lenders also appear to be bullish on the near-term outlook for the lodging industry and continue to demonstrate increasing confidence by providing debt for hotel acquisitions and refinancing. Debt service coverage ratios remained below pre-recession levels, while loan-to-value ratios increased 281 basis points compared to last year.

“We did notice a slight uptick in interest rates, however, on average they remain below six percent. Rates for limited-service hotels were slightly higher than those for full-service properties.”  There was little change in the amortization period, but the loan term -- or year of balloon payment—increased by more than one year, demonstrating the enhanced confidence of lenders,” says Smith.

“The convergence of positive operating fundamentals and a favorable financing environment makes this an exceptional time for all participants in the US lodging industry. Current owners are benefiting from strong returns and rising values. Meanwhile, new investors are able to take advantage of favorable financing terms, and the potential for NOI growth in the near-term.”