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Jones Lang LaSalle Hotels reports Manhattan hotels captured an average of $681 PSF during a 10-year period, as compared to office and multifamily assets
Nov. 15, 2012 — Manhattan hotels remain the king of all asset classes in the market, recording the highest sales price per square foot in the city over the past few years. The findings were released today in a Jones Lang LaSalle Hotels’ report, titled “FocusOn: Evolution of Hotel Price per Square Foot.” The debut report compares the price per square foot of hotel properties sold during a 10-year period against the price per square foot of office and multifamily assets and finds hotels command an average of $681 per square foot.
In 2011, the price per square foot for hotel, office and multifamily real estate assets in Manhattan equalled $752, $721 and $472, respectively. In 2012, the price per square foot for hotels is expected to increase to a whopping $890, due to high profile transactions like the Essex House Hotel, which traded in September 2012, and several other high-priced hotel sales that have closed or are expected to close by year end.
“Investment volume in New York hotels jumped to an all-time high of $3.5 billion in 2011, and we expect total investment volume will reach $2.4 billion in 2012,” said Arthur Adler, Managing Director and CEO of Jones Lang LaSalle Hotels, Americas. “The price per square foot for hotel properties has historically surpassed other asset classes, although the gap between hotel and multifamily prices has narrowed over the past two years.”
The report demonstrated that at the height of the recession, on a price-per-square-foot basis, office properties posted a 54 percent drop in 2009 compared to a decrease of 17 percent for multifamily, while hotels increased by one percent during the same time period.
The multifamily sector exhibited the strongest recovery, with a price-per-square-foot increase of 71 percent between 2009 and 2011, compared to a boost of 34 percent for office and a drop of 24 percent for hotels. The decline in hotel price per square foot between 2009 and 2010 is counterintuitive as the transactions market was considerably stronger in 2010 and 2011.
“Although surprising, the decline in price per square foot for hotels can be explained by looking at the type of hotels that were sold in 2009,” said Amelia Lim, Executive Vice President of Jones Lang LaSalle Hotels’ Strategic Advisory and Asset Management division. “The hotels sold that year were overwhelmingly smaller and newer select service hotels. Those transactions skewed the price per square foot upward in a year when there were few transactions overall.”
The price-per-square-foot comparison was calculated using a new index created by Jones Lang LaSalle Hotels to make it easier for investors to compare the value of hotel properties with other real estate assets. The index was derived through an analysis of hotel sales completed in Manhattan during the 10-year period from 2002 to 2011, encompassing activity across economic cycles. For each sale, the building’s gross square footage was obtained from public sources and adjusted to exclude components that were not part of the transaction, such as commercial or residential interests.
“The price-per-square-foot metric is designed to supplement the already widely used price-per-key-comparability metric,” said Adler. “In an urban gateway market such as Manhattan, where land prices command a premium, it is important that hotel investors are able to compare hotel values to that of other commercial real estate types to ensure they are gaining the maximum return on their investment.”
The price-per-square-foot index efficiently encapsulates the main drivers of hotel value:
• Inherent product quality, including category and necessary renovation work to complete• Historical profitability and turnaround opportunity and potential revenue enhancement• Location• Status of interest acquired (fee simple/ground lease), presence of SRO units, etc.• Operator and brand encumbrance • Excess development rights• Market cycles
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