Cornell Real Estate Market Indices

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https://hdl.handle.net/1813/70524

The Cornell Center for Real Estate and Finance has developed a series of real estate return indices in support of the real estate investment and finance community. The quarterly Cornell Real Estate Market Indices have filled an information gap for real estate owners, investors, and stakeholders by providing a statistically reliable set of return indices.

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Now showing 1 - 20 of 46

Mixed Signals Portend Greater Uncertainty Ahead
Liu, Crocker; Nowak, Adam; White, Robert Jr. (2023-04-14)
Although hotels showed continued positive price momentum in all regions from the prior year (year over year), prices faltered in some regions from the prior quarter, especially in the Mid-Atlantic and to a lesser extent in the South Atlantic regions. Hotels in non-gateway cities continued to outperform hotels in gateway cities, albeit the gain was relatively small compared to prior periods. The transaction volume for both large hotels and small hotels declined again this quarter as well as relative to the previous year. Based on our moving averages, a buying opportunity currently exists for both large and small hotels, although it might pay to continue to keep the gunpowder dry. Not surprisingly, the volume of hotel loan originations fell, while the interest rate on hotel loans continued to rise. Although lenders have reduced the amount of additional compensation they require to make hotel loans relative to other commercial real estate loans (i.e., hotel risk assessment), Wall Street’s valuation of REITs reveals an expectation of higher relative risk for hotels. Since the borrowing costs continue to exceed the return on hotels, economic profit and shareholder value added remain negative, indicating that anticipated future price gains are the primary driver of hotel investment performance. Looking towards the next quarter, our leading indicators of hotel price performance indicate that we should expect price momentum to moderate or decline for both large and small hotels.
Music Refrain: One More Time
Liu, Crocker; Nowak, Adam; White, Robert Jr. (2023-02-01)
The price of hotels showed strength in all regions except the South Atlantic this quarter, with all regions except New England experiencing double-digit growth year over year. Hotels in non-gateway cities posted higher quarterly and yearly gains relative to gateway cities, with the non-gateway hotels’ prices increasing 4 percent for the quarter, compared to 2 percent for gateway properties. On a year-to-year basis, non-gateway hotels recorded a 19-percent increase versus 3 percent for gateway properties. However, regardless of price changes, the transaction volume for all hotels (that is, both large hotels and small hotels) fell this quarter. With regard to price, small hotels appear to be undervalued (while large hotels range from correctly priced to overvalued) based on both a 3-year and a 5-year moving average. The cost of hotel debt financing continued to rise this quarter, as well as year over year. Lenders are requiring relatively more compensation for hotel loans relative to the 10-year risk-free rate due to increased perceived risk. As in the previous period (Q3 of 2022), our economic-value-added and shareholder-value-added metrics continue to indicate that the cost of borrowing exceeds the return for hotels. Looking toward the next quarter (i.e., near term), our leading indicators of hotel price performance indicate that we should expect slower or declining price momentum for larger hotels but not necessarily for smaller hotels. This is volume 11, issue 4 of the hotel indices series.
Long Small Hotels, Short Large Hotels
Liu, Crocker; Nowak, Adam; White, Robert Jr. (2022-10-19)
The price of hotels showed particular strength in the Mid-Atlantic, Pacific, and West South Central regions, while other regions experienced positive growth albeit at a slower rate relative to the previous period. Hotels in non-gateway cities posted higher quarterly gains relative to those in gateway cities, increasing 2 percent compared to a drop of 4 percent for gateway hotels. With regard to yearly prices, hotels in non-gateway cities increased 21 percent as compared to a rise of 1 percent in gateway cities. The transaction volume on all hotel transactions (both large hotels and small hotels combined) mimicked the previous quarter’s sales volume. The prices of small hotels appear undervalued (while those of large hotels appear overvalued), based on both 3-year and 5-year moving averages. Mortgage volume for hotels fell slightly for the most recent quarter, while the the cost of hotel debt financing has continued to rise quarter to quarter, as well as year over year. In short, lenders are requiring relatively more compensation for hotel loans relative to the 10-year risk-free rate due to increased perceived risk. The rise in borrowing cost will dampen enthusiasm for undervalued hotel properties, since our EVA and SVA metrics continue to indicate that the cost of borrowing exceeds the return for hotels. Looking toward the next quarter, our near-term leading indicators of hotel price performance indicate that we should expect slower or declining price momentum for large hotels but not necessarily for small hotels.
Heading into Economic Headwinds
Liu, Crocker; Nowak, Adam; White, Robert Jr (2022-07-26)
The price of hotels rose in all regions except the Mid-Atlantic this quarter. Hotel prices in the Mountain and South Atlantic regions reached new statistical highs, while hotel prices in the Pacific region continued to remain above their statistical high. Hotels in non-gateway cities posted higher quarterly gains relative to gateway cities, as non-gateway prices increased 5 percent, compared to 3 percent for hotels in gateway cities. The transaction volume on all hotel transactions ((both large hotels and small hotels combined) surged 27 percent this quarter (61% year over year). Median prices also rose this quarter for both large and small hotels as well as hotels in non-gateway cities while hotels in gateway cities declined 23 percent. The prices of large and small hotels appear to be undervalued based on moving averages. However, the cost of hotel debt financing rose sharply this quarter, as well as year over year. Lenders are requiring relatively more compensation for hotel loans relative to other commercial real estate, and to the 10-year risk-free rate due to increased perceived risk. The rise in borrowing cost will dampen enthusiasm for undervalued hotel properties, since our EVA and SVA metrics indicate that the cost of borrowing exceeds the return for hotels.
Beware the Ides of March
Liu, Crocker; Nowak, Adam; White, Robert Jr (2022-04-18)
The price of large hotels fell by .25 percent, while that of smaller hotels increased 3.3 percent this quarter. On a regional basis, the MidAtlantic had the best quarterly gains, with the Pacific region also doing well, while the Midwest suffered price declines. Hotels in both gateway and non-gateway cities continue to post positive performance, with greater gains for hotels in non-gateway cities. Transaction volume declined this quarter (from the previous quarter), although it was still stronger relative to the same quarter last year. Our moving average trendlines indicate that both large and small hotels are priced to buy. Large hotels continue to decline, while smaller hotels are rising, based on our standardized unexpected price (SUP) performance metric. In terms of financing hotels, mortgage-financing volume continued to rise, although the cost of financing hotels rose sharply this quarter. The relative risk premium has remained stationary this quarter, although the hotel delinquency rate has declined along with the riskiness of hotels compared to other major types of commercial real estate. Hotel deals continue to look profitable based on our economic value added (EVA) and shareholder value added (SVA) metrics, although they are nearing breakeven. Looking toward the next quarter, our leading indicators of hotel price performance indicate that in the near term we should expect slower or declining price momentum for both large and small hotels.
Converging Towards Normalcy
Liu, Crocker; Nowak, Adam; White, Robert Jr (2022-01-20)
Hotel prices continue to converge toward pre-pandemic levels. Gains posted were smaller relative to the previous quarter but higher year over year. Hotels in both gateway and non-gateway cities continue to exhibit positive performance, with hotels in non-gateway cities posting greater gains. Transaction volume continued strong for large and small hotels quarter over quarter and year over year, although the increase in volume was smaller in this instance than was the increase in the prior period. Our moving average trendlines indicate that large hotels are priced to buy, while small hotels are priced at market (priced fairly). Large hotels declined from their statistical high set last quarter, based on our standardized unexpected price (SUP) performance metric. In terms of financing hotels, mortgage financing volume continued to rise, as the cost of financing hotels slightly diminished this quarter. Among factors that have contributed to this situation are the relative risk premium, which has remained stationary this quarter, and a continued decline in the hotel delinquency rate. Hotel deals continue to look profitable, based on our economic value added (EVA) and shareholder value added (SVA) metrics. Looking toward the next quarter, our leading indicators of hotel price performance indicate that we should expect slower or declining price momentum for larger hotels but positive price gains for smaller hotels.
Pole Vaulting to New High
Liu, Crocker; Nowak, Adam; White, Robert Jr (2021-11-01)
Hotel prices continued to gain ground during the recent quarter, regaining losses incurred during the pandemic. Prices in all regions are reverting to their long-term average, with hotels in the Pacific and South Atlantic regions rising above their standardized average. Hotels in both gateway and non-gateway cities continue to exhibit positive performance, although hotels in the gateway cities have posted greater gains. For both large and small hotels, transaction volume increased both quarter over quarter and year over year. Our moving average trendlines indicate that large hotels are priced to buy, while small hotels represent an opportunistic buy at best. Large hotels reached a new statistical high based on our standardized unexpected price (SUP) performance metric. Mortgage financing volume rose, given that financing costs were lower this quarter. Among factors that have contributed to this situation are the facts that the relative risk premium remained stationary this quarter and that the hotel delinquency rate has continued to decline. Our economic value added (EVA) and our shareholder value added (SVA) are positive, indicating that hotel investment based on operating performance is currently financially feasible. Looking toward the next quarter, our leading indicators of hotel price performance indicate that positive price momentum should continue to exist for both large and small hotels.
Second Quarter 2021: Are We There Yet?
Liu, Crocker; Nowak, Adam; White, Robert Jr (2021-07-15)
United States hotel prices have rebounded above their statistical lower bound in all regions except the Mountain states, signaling a return toward their pre-pandemic level—although we are not quite there yet. Prices of hotels in gateway cities rose 6 percent, while hotels in non-gateway cities climbed almost 7 percent on average this quarter. Transaction volume also increased for both large hotels and small hotels, with large hotels rising 79 percent and small hotels, 57 percent on a quarter-over-quarter basis. Our moving average trendlines and standardized unexpected price performance metrics indicate that large hotels (those over $10,000,000) are fairly priced, while small hotels are opportunistic buys at best. The cost of debt financing for hotels declined approximately 17 basis points (bps) this quarter with interest rates currently at 5.55 percent for Class A hotels and 5.75 percent for Class B and C hotels. However, the spread in interest rates between hotels and other commercial real estate (relative risk premium) has widened slightly, from 211 basis points in March to 215 basis points at this writing. The total risk associated with hotel REITs has also increased relative to the total risk for other major types of commercial real estate REITs. This indicates that the capital market still perceives hotels to be relatively riskier, although the delinquency rate on hotel loans (currently at 14.27%) continues to decline from its high of 24.3 percent (June 2020) toward its pre-pandemic level of around 1.51 percent (2019Q4). Our economic value added (EVA) and new shareholder value added (SVA) metrics are negative, indicating that borrowing costs exceed operating performance. As a consequence, any deals done will be based on long-term price appreciation for the deal to pencil. Looking toward the next quarter, our leading indicators of hotel price performance indicates that positive price momentum should continue to exist for both large and small hotels.
The Phoenix Is Rising
Liu, Crocker; Nowak, Adam; White, Robert Jr (2021-04-19)
Although the price of hotels along the east coast declined again this quarter the rate of decline has continued to lessen. Hotels in gateway cities reversed course, outperforming hotels in non-gateway cities. Our moving average trendlines and standardized unexpected price performance metrics indicate that both large and small hotels remain undervalued, pointing to a buy opportunity. There are indications that lenders appetite for hotels continues to increase. A reading of our tea leaves suggests that we should see positive price momentum for both large and small hotels. This is report number 38 of the index series.
A Glimmer of Hope Amidst a Hemorrhage
Liu, Crocker; Nowak, Adam; White, Robert Jr (2021-01-20)
Prices of hotels along the east coast continue to drop, although the rate of decline has moderated. Hotels on the west coast enjoyed positive price momentum, both on a quarter-over-quarter or year-over-year basis. Hotels in gateway cities exhibited poorer price performance than those in non-gateway cities. Our moving average trendlines and standardized unexpected price performance metrics indicate a positive price reversal for large hotels, while the hemorrhaging continues for small hotels. There are indications that lenders are more willing to finance hotels going beyond best-in-class hotel properties, although the cost of financing and the relative risk premium remain high. This is report number 37 of the index series.
Is It Time for Bottom Fishing?
Liu, Crocker; Nowak, Adam; White, Robert Jr (2020-10-12)
The prices of hotels in all regions continue to hemorrhage, with hotels in the Middle Atlantic and South Atlantic regions particularly hard hit. In contrast, hotels in the Mountain states suffered the fewest losses. Hotels in gateway cities continued to have lower price decline relative to those in non-gateway cities. Both our moving average trendlines and standardized unexpected price performance metrics indicate continuing negative price momentum for both large and small hotels. The relative risk premium that lenders require for hotels is still higher than that of other commercial real estate, except for retail properties. Our tea leaves suggest that both large and small hotels should continue to decline in price. This is report number 36 of the index series (year 9, issue 3).
Fourth Quarter 2013: Flight to Quality: Big Trumps Small
Liu, Crocker H.; Nowak, Adam D.; White, Robert M. Jr. (2014-01-01)
A new hotel investment performance metric is introduced. Starting with this issue, we will apply our new economic value added (EVA) indicator as a barometer of hotel investment performance. Complete details of how to use this benchmark and why it is superior to evaluating cap rates relative to 10-year Treasury rates can be found in the recent publication from the Center for Hospitality Research and Center for Real Estate and Finance entitled “Using Economic Value Added (EVA) as a Barometer of Hotel Investment Performance,” by Matthew J. Clayton and Crocker H. Liu. Essentially, the hotel EVA spread tells us whether the current hotel yield (cap rate) exceeds the total borrowing cost (weighted average cost of capital; also includes the cost of equity financing) for doing a typical deal. Intuitively, if an investor finances a hotel project using 7-percent financing, the current yield on the project should exceed the 7-percent borrowing cost. Exhibit 1 (next page) shows that the EVA spread for hotels was positive until the first quarter of 2008. Subsequent to this period, the EVA spread has been either negative or near zero except for the second quarter of 2012 when it was positive. A negative EVA spread indicates that any return for hotel investors must come at the back end of the project. The expectation is that they will make their money when they sell the hotel due to price appreciation rather than making their money immediately.
First Quarter 2013: Is the Trend Our Friend?
Liu, Crocker H.; Nowak, Adam D.; White, Robert M. Jr. (2013-05-01)
The Cornell Hotel Indices reveal that the hotel industry is continuing to experience positive price momentum for small hotels with a continued weakening in price for larger hotels. Hotel properties also exhibit a narrowing premium relative to other property types, signaling lower perceived default risk for hotel properties. Our index of business confidence suggests that we should expect to see a reversal in the prices for larger hotels in the near term given a strengthening in the economy. We also expect rising prices for smaller hotels and our repeat sales index going forward based on the NAREIT Lodging/Resort index, the Architecture Billing Index, and the moving average trendline for the Consumer Confidence Index. This is paper number 6 of the index series.
Second Quarter 2013: Where Are We in the Hotel Real Estate Cycle?
Liu, Crocker H.; Nowak, Adam D.; White, Robert M. Jr. (2013-07-01)
We introduce a new tool in this issue to gauge where hotel prices are heading based on past hotel real estate cycles. Mixed signals exist and depend on the benchmark used. Cycle analysis based on the hedonic index indicates that we are approaching a peak in large hotel prices in contrast to the repeat sales approach, which indicates that we are still in the growth phase of the current hotel real estate cycle. In terms of the current quarter, a reversal has occurred in the Cornell Hotel Indices, with the price for larger hotels rising in the current quarter while small hotels have experienced a negative shock. Hotel properties also exhibit a slight rise in the premium relative to other property types, signaling slightly higher perceived default risk for hotel properties. Our business confidence metric, the NAREIT Lodging/Resort index, and the Architecture Billing Index all suggest that we should expect to see another reversal in the prices for larger hotels, and our repeat sales index in the near term with both anticipated to decline. We also expect rising prices for smaller hotels going forward based on the moving average trendline for the Consumer Confidence Index. This is paper number 7 of the index series.
Fourth Quarter 2012: Price Growth Is Moderating: A Return to Normalcy?
Liu, Crocker H.; Nowak, Adam D.; White, Robert M. Jr. (2013-01-01)
The Cornell Hotel Indices reveal that the hotel industry is continuing to experience positive price momentum for small hotels, with a moderating of prices for larger hotels. Consistent with this weakening in the price for larger hotels, construction costs for new 5-star hotels are now on par with the price of existing hotels. We also observe a lowering of expected growth in net operating income for full service hotels with anticipated NOI growth also moderating for limited service hotels. Hotel properties also exhibit a widening premium relative to other property types, signaling higher perceived default risk for hotel properties. Our index of business confidence suggests that we should continue to see a moderation in the prices for larger hotels. We expect a moderating of prices for smaller hotels going forward given the flattening of expected growth in NOI for limited service hotels and the worsening of consumer confidence in December. We also anticipate a continuous, slow growth in the hotel repeat sale index based on the NAREIT Lodging/Resort index and the Chemical Activity Barometer. This is paper number 5 of the index series.
Third Quarter 2013: Good Vibes (Nahenahe)
Liu, Crocker H.; Nowak, Adam D.; White, Robert M. Jr. (2013-10-01)
Our hotel real estate cycle analysis based on the repeat sales approach indicates that we will continue to experience an upward price momentum. This quarter, for the first time since the commercial real estate boom in 2004, all three of our price indices— large hotels, small hotels, and repeat sales of hotels— have positive price trends and are moving in the same direction. Hotel properties also exhibit a slight decline in the premium relative to other property types signaling that investors currently have lower perceived default risk for hotel properties. Our business confidence metric, along with the NAREIT Lodging/Resort index and the Architecture Billing Index, suggests that we should continue to expect to positive price momentum for larger hotels and our repeat sales index in the near term. We also expect a slight decline in prices for smaller hotels going forward based on the Consumer Confidence Index. This is paper number 8 of the index series.
Third Quarter 2012: And the Beat Goes On
Liu, Crocker H.; Nowak, Adam D.; White, Robert M. Jr. (2012-10-01)
In our inaugural issue of the Cornell Hotel Index series, we introduced three new quarterly metrics to monitor real estate activity in the hotel market. These are a large hotel index (hotel transactions of $10 million or more), a small hotel index (hotels under $10 million), and a repeat sales index (RSI) that tracks actual hotel transactions. These indices are constructed using the CoStar and RCA commercial real estate databases. The large and small hotel indices are similar in nature and construction to the consumer price index (CPI), while the repeat sale hotel index is analogous to the retail concept of same store sales. Using a similar logic process for hotels, we compare the sales and resales of the same hotel over time for that index. All three measures provide a more accurate representation of the current hotel real estate market conditions than does reporting the average transaction prices, because the average-price index doesn’t account for differences in the quality of the hotels, which also is averaged. A more detailed description of these indices is found in the first edition of this series, “Cornell Real Estate Market Indices,” which is available at no charge from the Cornell Center for Real Estate and Finance. In this fourth issue, we present updates and revisions to our three hotel indices along with commentary and supporting evidence from the real estate market.
First Quarter 2020: Gird Your Loins
Liu, Crocker H.; Nowak, Adam D.; White, Robert M. Jr (2020-04-01)
Hotels in all regions experienced negative price momentum this quarter with hotels in the New England area having the worst price performance. Hotels located in gateway cities were especially hard hit. Hotel financial operating performance based on economic value analysis (EVA) has turned negative, indicating that hotel returns are coming primarily from future price appreciation. The prices of large and small hotels have both trended downwards toward their long run average from the perspective of our moving average trendlines and standardized unexpected price performance metrics. The cost of hotel debt financing has fallen this quarter while the cost of equity financing has increased, making it costlier to borrow equity capital. In terms of risk premiums, the risk premium for hotels has risen compared to the risk-free rate. Besides this, the relative risk premium that lenders require for hotels over and above other commercial real estate has also increased, indicating that lenders are demanding a higher compensation for originating hotel loans. A reading of our tea leaves suggests that both large and small hotels are expected to decline in price. This is report number 34 of the index series.
Fourth Quarter 2019: 2019 Ends on a Whimper
Liu, Crocker H.; Nowak, Adam D.; White, Robert M. Jr (2020-01-01)
Onlyhotels in the New England region, and to a lesser extent the Midwest region, experienced a positive price momentum this quarter, although both regions suffered poor performance from a year-over-year perspective. Hotels located in gateway cities outperformed hotels in non-gateway cities. Hotel financial operating performance continued to post positive profit with operating profit exceeding both a hotel property’s operating costs and its financial (borrowing) cost based on economic value analysis (EVA). Although the price of large hotels increased in the fourth quarter (as compared to quarter three), the price of small hotels declined quarter to quarter, and the price of both large and small hotels fell on a year-over-year basis. It appears that the price of both types of hotels is reverting to their moving average. The cost of hotel debt financing remained flat this quarter, while the cost of equity financing declined. In terms of risk premiums, there was no change in the risk premium for hotels compared to the risk-free rate. Besides this, the relative risk premium that lenders require for hotels over and above other commercial real estate has narrowed, indicating that lenders aren’t demanding a higher compensation for originating hotel loans. However, the spread between the 10-year Treasury and the 3-month Treasury was flat in the current period, which continues to raise concerns over its impact on market liquidity as well as its contribution to slower price growth in hotels. A reading of our tea leaves suggests that large hotels should be expected to decline in price. In contrast, the price of smaller hotels is anticipated to rise. This is report number 33 of the index series.
Second Quarter 2019: Gradual Hotel Slowdown: Has the Party Ended?
Liu, Crocker H.; Nowak, Adam D.; White, Robert M. Jr (2019-07-01)
In this issue, we introduce our new regional indices of hotel performance. Based on these indices, hotels in the Midwest and Mountain regions (mostly hotels in Arizona, Colorado, and Nevada) have outperformed other regions, while hotels in the Pacific region (primarily California) and South Atlantic region (mostly Florida) have grown at a more moderate pace in the post-recession era. The performance of hotels in gateway cities declined this quarter, narrowing the gap in performance relative to hotels in non-gateway cities. Hotel financial performance overall is now in the red zone: operating profit stands below a hotel property’s borrowing cost based on economic value analysis (EVA). The price performance of small hotels and repeat sale hotels has reversed course and has started to weaken, while larger hotels continued their downward price spiral. The cost of hotel debt financing and equity financing have declined, with no change in the relative risk premium for hotels. However, the spread between the 10-year U.S. Treasury bond and the 3-month bond is now in negative territory, which might affect market liquidity as well as contribute to slower price growth in hotels. A reading of our tea leaves suggests prices are expected to decline for both large and small hotels. This is report number 31 of the index series.

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