Hotels in all regions experienced negative price momentum this quarter with hotels in the New England area having the worst price performance. Hotels located in gateway cities were especially hard hit. Hotel financial operating performance based on economic value analysis (EVA) has turned negative, indicating that hotel returns are coming primarily from future price appreciation. The prices of large and small hotels have both trended downwards toward their long run average from the perspective of our moving average trendlines and standardized unexpected price performance metrics. The cost of hotel debt financing has fallen this quarter while the cost of equity financing has increased, making it costlier to borrow equity capital. In terms of risk premiums, the risk premium for hotels has risen compared to the risk-free rate. Besides this, the relative risk premium that lenders require for hotels over and above other commercial real estate has also increased, indicating that lenders are demanding a higher compensation for originating hotel loans. A reading of our tea leaves suggests that both large and small hotels are expected to decline in price. This is report number 34 of the index series
