Hotels Added to Index, Outperform Other CRE

Moody’s has added hotels to the real estate categories monitored by the agency’s national all-property Commercial Property Price Indices, which now also include the effect of distressed sales.

Moody’s/RCA CPPI: Hotels in Major Markets See Sharp Price Growth report shows major market hotel prices increased 19.2% over the last two quarters, more than double the 7.9% increase in non-major market hotel prices.

CPPI is significantly higher than the national all-property composite index, which increased 2.1% in June, a 0.7% increase in Apartment prices and the 2.6% increase in core commercial property prices, analysts said.

Nonetheless improvements are merely closing the before and after crisis gap. Major market hotel prices are 11.3% below their March 2008 national peak, while non-major market hotel prices are 34.3% below peak.

The hotel property feature added to the Moody’s/RCA CPPI for the first time this month will track national, major-market and non-major market hotel price trends on a quarterly basis, analysts said. But since datasets start from December 2004, it will not be rolled up into the national all-property index whose information starts in December 2000.

The national all-property composite also improved at up to 16.4% below its December 2007 peak. "Although both versions have appreciated approximately 40% since the trough, the decline in the series excluding distressed sales following the financial crisis was slower," said Moody’s director of commercial real estate research, Tad Philipp.

Price growth is moderating in several commercial real estate sectors that are approaching pre-crisis peak levels and accelerating in the sectors that are further below the peak affecting returns and risks.

Over the last three months suburban office prices increased 4.9%, outpacing the 1.3% contraction in central business district office prices.

Distressed transactions affected non-major market CBD office prices the most and major market apartment prices the least. By June non-major market CBD office prices were at 25.9% below peak, compared to 6.9% below peak if distressed transactions are excluded.

Major market apartment prices are 11.8% above their peak, or 13.6% above were distressed transactions excluded.

It is important to note the roughly 100 basis point rate increase in the 10-year Treasury implemented in May “had little impact on commercial property prices through June, because prices for many of the transactions that closed in June were negotiated before the full rate increase set in,” he explained. Commercial property prices are expected to appreciate alongside Treasury rate increases “totaling approximately 200 basis points over the next few years.”