Posted by Guest Blogger | October 6, 2014
Investors and the need to understand hospitality real estate
In the commercial real estate world, there are several different types of properties an investor can choose to invest in. One specific segment within the commercial real estate industry is the hotel segment. This is where several properties are listed as hospitality real estate for sale in the open market. When identifying the best type of hotel to invest in, there are several elements to consider. One of the largest elements to consider will ultimately be whether the investor should procure a full service hotel or if it would be better to procure a limited service hotel.
What’s the difference in a full service hotel and a limited service hotel?
When an investor searches for a hospitality real estate property for sale, he or she must properly understand the differences in the types of hotels available on the market. An uninformed buyer will need to understand the differences between a full service hotel and a limited service hotel, and how those differences can affect the end game of the investment.
• LIMITED SERVICE HOTEL – These types of hotels typically operate with a low overhead costs, offering a limited assortment of amenities such as a small business center, guest laundry facilities, a small fitness center, in-room coffee, and often times a pool. These classified hotel or motel facilities target the more budget-conscious travelers, offering them with lower room rates than what might be expected at a full service hotel. • FULL SERVICE HOTEL – These types of hotels commonly provide luxurious amenities, large facilities, and banquet halls to accommodate meeting and special event needs. Full service hotels often have on-site dining facilities that usually include fine dining options and upscale lounges. This hotel segment typically requires a higher overhead cost for these services. Other services that might be found at a full service hotel include extended rooms services, doormen, valet parking and concierge services.
For investors, what are the differences between a full service hotel and a limited service hotel?
In general, the average daily rate (ADR) for full service hotels is greater than the ADR for limited service hotels. The ADR has a direct correlation with another industry standard, revenue per available room, which is regularly higher with full service hotels. These averages impact how this industry evaluates and prices properties on the open market. Determining the market value can be accomplished by analyzing the CAP (capitalization) rate. This is performed by distinguishing the net operating income produced by the hotel divided by the capital cost. According to Real Capital Analytics, during the month of August, full service hotels traded on average (nationally) just above a CAP rate of 7.5% and limited service hotels traded around a 8.5%.
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What does this mean for investors seeking hospitality real estate for sale
The average hotel enthusiast can expect to pay a higher premium for a full service property. This does not mean the property is a better buy. Generally speaking, a property with a higher CAP rate usually indicates that the investment is less risky. When looking for hospitality real estate for sale, an investor should analyze the amount of risk they would like to take on versus the reward that could be potentially gained from the investment. While seeking a hotel investment, one should reach out to their local hospitality commercial real estate agent, to properly analyze which investment is right for them. Click here to find this author online, Bryan Morelock, Advisor