Reality Settling in for Hotel Sellers

Steve Marx, president of Hotel Source Inc., admits the Chicago hotel market is softer this year, with less corporate, tourism and convention business reported. However, he adds the Midwest region is faring better than other places, such as New York and San Francisco, and "success stories" still can be found.

Brian D. Flanagan, president of Property Valuation Advisors Inc., sees the current hotel economics as a wash--first-quarter occupancy is off about 3.5% he says, but that's offset by a 3.5% improvement in ADR. Flanagan finds a success story in the Downtown market, where room rates remain around their historic highs of $160 a night at the end of 2000.

Part of the reason for the solid room rates Downtown is that financing is tougher to get for bigger developments. "Any type of development has ground to a halt," Flanagan says, as lenders become more cautious regardless of where the deals are.

One submarket where would-be hotel developers may want to consider is limited-service properties in the suburbs, Flanagan suggests, a smaller but more doable deal assuming the developer has a relationship with a local bank.

If those types of properties sell, they may change hands at capitalization rates approaching 13%, Marx suggests. Overall, the range is from 10% to 13%, he explains, with Central Business District properties commanding cap rates at the lower end of the spectrum, perhaps as low as 9%. However, that's up from 7% to 8% seen last year, Marx adds.

Rather than building, Milwaukee-based Baymont Inns & Suites recently announced it has recently re-opened or is converting 10 properties to the Baymont brand, including one in west suburban North Aurora.

Although properties may not be pulled off the market, some shop-worn listings are no longer being marketed because the owner has realized they will not get their lofty price target, Marx says. "They still want to sell if they can get their price. But buyers aren't telling them what they want to hear," he adds.

Sellers argued that with ADRs rising twice as fast as the rate of inflation, their properties were worth the high sticker prices, Marx says. However, buyers are no longer betting on that scenario for the future and instead foresee meager increases in rates coupled with lower occupancies.

Marx sees little short-term change in the hotel market, adding construction financing will continue to be difficult to come by. However, Flanagan points out the five-month season between June through October can be expected to be strong.