HVS continually tracks the rates of return on the assets on which we consult. In our most recent review, we found that equity yield rates, on average, have shown a continued trend of decline in the full-service and luxury hotels sector, as well as the lower-tier limited-service sector, with the select-service and upscale limited-service sector showing stability.
Equity yield rates were notably lower for full-service and luxury hotels, averaging 16.4% for the year-to-date 2019 period, which is 140 basis points (bps) below the 17.8% most recent peak level recorded in 2017. This decrease was driven largely by a decline in the number of transactions thus far this year. Moreover, 31% of the recorded transactions with derived equity yield rates occurred in New York City, which drove down the average modestly.
Equity yield rates for the select-service and upscale limited-service hotels averaged 18.6% for the year-to-date period ending September 2019, registering a slight uptick from the 2018 level (or virtually no change). The stability in this asset class reflects that a low point was found in the 2018/19 period; a difference of essentially one percentage point is considered reasonable and normal between this category and the lower-tier limited-service category.
The average equity yield rate for lower-tier limited-service hotels similarly showed a notable decline in 2019. The average for the year-to-date period fell to 19.5%, or 150 bps lower than the 2017 peak. Factors that have contributed to this trend include several hotels in the Pacific Northwest that sold with equity yield rates in the 17.0% to 18.0% range; however, most sales shown with equity yield rates did trade in the 19.0% to 20.0% range.
Total property yields (overall discount rate) similarly declined for the full-service and luxury hotels, as well as the lower-tier limited-service category, while holding steady in the select-service and upscale limited-service category. Total property yields are averaging 10.0% thus far in 2019 for the full-service and luxury category. Higher levels of 10.8% for select-service and upscale limited-service hotels and 11.4% for lower-tier limited-service hotels were recorded.
Rates of return are calculated using the actual sale prices of the hotels with forecasted cashflows and inputting market terms for fixed-rate financing on a ten-year hold.
Rodney G. Clough
Rod Clough, MAI, is the Senior Managing Director of the HVS Denver office; Rod is also a partner in the HVS Atlanta, Dallas, Houston, Minneapolis, Philadelphia, St. Louis, and Mexico City offices. This group of offices represents over 60 hotel industry professionals and executes over 2,000 assignments a year.