Investors find hotel market looking better.

The hotel market is looking better to investors, according to the most recent survey of investors seeking hotel acquisitions. The third quarter Korpacz Real Estate Investor Survey - Hotel Market Report conducted by Coopers & Lybrand L.L.P. shows an improving national hotel market. Most investor

Full-Service Hotels Seeing Increased Investments

Investment activity in the full-service market continues to spread, with the number of investors seeking acquisitions increasing, the survey found.

"Potential investors in full-service hotels believe that as the market for real estate investment trusts (REITs) continues to expand, there will be increased competition for quality assets," explains Grant Sabroff, the Cleveland-based director with Coopers & Lybrand's Hospitality Industry Consulting Services group who compiled the results.

Sabroff notes that investment activity for full-service hotels extends from coast to coast, with several participants mentioning good opportunities in California.

He adds that the situation has evolved from a buyer's to a seller's market, with sellers holding onto properties as market performance improves and increases in value. Limited new construction, rising room demand and average daily rates, which strengthen cash flows, are also aiding the market.

Investors cited the Midwest, Southeast and East Coast as preferred regions for full-service hotel acquisitions. The West Coast is attracting more interest, while the Northeast continues to receive less, he notes.

Sabroff predicts that the full-service market will experience more transaction activity, because relatively no new construction is anticipated within the next year. "Therefore," he suggests, "acquisitions remain the path of choice as market conditions and industry profitability progress."

Limited Service Hotels are "Hot"

Limited-service, particularly chainaffiliated hotels in strong markets, continue to maintain their popularity and attract investors, the survey found. Most participants report that prices/values for this type of product are climbing. As a result, many investors are pursuing development opportunities as well as acquisitions.

Sabroff notes that a number of new REITS have also entered the economy/-limited service segment. At least one participant believes that REITs tend to overpay for hotel assets, contributing to increasing prices/values.

Most participants indicated their preference for franchised properties in strong market locations, particularly in the Southwest and Midwest, and the East and West Coasts.

"Given the smaller initial capital outlays relative to other hotel investment options, the economy/limited-service segment is poised to do well," says Sabroff. "As prices and values increase further, development will surely increase as well."

Investors Returning Slowly to Luxury Market

The large capital requirements, perceived higher risk and longer period required to realize investment objectives, along with the lack of available debt capital, deter many investors from the luxury market. However, this segment does seem to be gaining some momentum, although small, according to Sabroff.

Luxury hotels are still valued below original construction and replacement cost, and investor competition for luxury products remains low compared to other segments, the survey found.

"These conditions will increase over the next year as cash flow levels improve," maintains Sabroff. "Offshore investors, particularly Asian groups, Middle Easterners and Europeans, seek select acquisitions mainly in the top commercial centers or resort locations."

Currently, investors in luxury hotels continue to search for properties that will trade at a discount from their original construction cost and that possess good potential because of more efficient management and/or improved cash flows.

The Korpacz Real Estate Investor Survey interviews equity investors or their advisors in institutional-grade real estate on a quarterly basis to help determine the investment criteria and cash flow assumptions they use in analyzing real estate investment opportunities. In addition to the hotel market, the survey looks at the mall, shopping center, office, industrial and apartment markets.