How Motels Are Appraised by Commercial Real Estate Appraisers
Appraising motels within the commercial real estate market requires a detailed evaluation of multiple factors to determine their fair market value. Commercial real estate appraisers utilize various approaches to provide accurate valuations, including the Income Approach, a secondary analysis based on the sale price per room, and considerations of property amenities.
This article explores how motels are appraised, with examples including capitalization rates (cap rates), sale price per room analysis, and the influence of property features on valuations.
The Income Approach and Capitalization Rates
The Income Approach is a cornerstone of motel appraisal, focusing on the property’s ability to generate income. The valuation formula is as follows:
Property Value = Net Operating Income (NOI) / Cap Rate
Key components:
Example Calculation
For a motel with an annual NOI of $500,000 and a typical cap rate of 8.63% (the average for focused-service hotels in Canada as of 2024):
Property Value = $500,000 / 0.0863
= $5,791,000
This method highlights how cap rates influence valuations.
Secondary Analysis: Sale Price Per Room
To provide a more comprehensive valuation, appraisers also perform a secondary analysis by examining sale price per room of comparable motel sales. This method involves:
- Researching Comparable Sales: Appraisers analyze recent motel sales within the same market or region.
- Calculating Sale Price Per Room: The total sale price of the property is divided by the number of rooms.
- Adjusting for Differences: Adjustments are made for variations in property condition, location, and amenities.
Example
A comparable motel in the same region recently sold for $4,500,000 and had 50 rooms. The sale price per room is calculated as:
Sale Price Per Room = $4,500,000 / 50
​=$90,000
If the subject property has 60 rooms and similar features, its estimated value using this method would be:
Estimated Value = 60 × $90,000 =$5,400,000
This method helps validate or refine the results from the Income Approach.
The Role of Property Amenities
Amenities play a significant role in influencing a motel’s value. Appraisers carefully evaluate features such as:
- Guest Experience Enhancers: Pools, fitness centers, and dining options.
- Revenue Generators: Meeting rooms, banquet halls, and convenience stores.
- Operational Efficiency: Modern HVAC systems, updated room fixtures, and energy-efficient designs.
For example, two motels with the same NOI may have different valuations if one offers additional amenities that attract higher occupancy or room rates.
Market Trends and Capitalization Rates
Market trends significantly affect both cap rates and sale price per room. In Canada:
- Cap Rates: Focused-service hotels averaged 8.63% in Q2 2024, while full-service hotels averaged 7.7%.
- Recent Market Data: The commercial real estate market saw $29.2 billion in transaction volume in the first half of 2024, with Vancouver, Calgary, and Edmonton leading in investment activity.
These trends reflect a robust but evolving hospitality market influenced by interest rates, inflation, and regional dynamics.
Conclusion
Appraising motels involves a blend of methodologies. The Income Approach provides a solid foundation by focusing on NOI and cap rates, while the Sale Price Per Room analysis offers a secondary layer of validation. Together with an evaluation of property amenities and market conditions, appraisers can deliver accurate and actionable valuations for stakeholders.
Whether you’re buying, selling, or refinancing a motel, understanding these appraisal techniques is essential for making informed decisions.
Use the discussion forums linked to here to ask questions you might have to the community.
This article has been prepared by Frontier Hospitality Advisor for general information only. Frontier Hospitality Advisor makes no guarantees, representations or warranties of any kind, expressed or implied, regarding the information including, but not limited to, warranties of content, accuracy and reliability. Any interested party should undertake their own inquiries as to the accuracy of the information. Frontier Hospitality Advisor excludes unequivocally all inferred or implied terms, conditions and warranties arising out of this article and excludes all liability for loss and damages arising there from.
Kootenay Motel/Hotel Sales Date and Analysis – I see you have that info for the Interior but not for the Kootenays – do you have that for here? I am a Realtor with C21 Assurance Real Estate in Creston and I am looking for that stuff. Thanks!
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