Inflated prices paid for U.S. hotels begin to outpace occupancy

June 24, 2011 08:41AM

High prices paid by real estate investment trusts for U.S. hotels may be beginning to outpace gains in room rates and stays, according to Bloomberg News. Average prices paid for lodging properties rocketed to $185,000 per room in the first quarter of 2011, having previously peaked at $153,000 in 2006, before plunging 37 percent only two years ago.

While occupancy rates are rising (up to 63 percent in the first quarter from 60 percent a year earlier), the gains aren’t happening quickly enough to keep up with inflated prices being paid for some full-service properties, said Rick Kleeman, managing partner at Wheelock Street Capital, a Connecticut-based REIT. “Asset prices on average have led fundamentals,” said Kleeman,. “Obviously you have fundamentals improving, but clearly the economy is not picking up as fast as we had hoped.

In cities such as New York, “hotels are routinely trading at $200,000 per key above what it would cost to replace them,” said Mark Elliott, a partner at Atlanta-based brokerage Hodges Ward Elliott.

Recent hotel transactions in New York include Pebblebrook’s purchase of six Denihan Hospitality Group hotels in Midtown and Aby Rosen’s purchase of the Paramount Hotel. [Bloomberg News]