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Technological Change as Reflected in Hotel Property Prices

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  • John Corgel

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Abstract

This paper investigates the effects of age on the sale prices of hotel real estate. Value erosion of commercial property due to the passage of time may be offset by renovation, although substantial follow-on investment usually occurs several years following construction. Obsolescence produces value losses during the post-construction period prior to new investment that result from technological change (Colwell & Ramsland, Journal of Real Estate Finance and Economics, 8(1), 47–63, 2003 ). A hedonic model is specified to allow age to measure the effects of obsolescence in hotel prices. Although the long-run obsolescence rate for hotel properties of 1.93%/year aligns closely with the rate estimated elsewhere for retail properties, the path of obsolescence through time shows some marked departures. Contrary to the theory and the empirical results from the retail real estate market, hotel prices do not reveal much more obsolescence in the years immediately following construction than later. Also, the age and sale price relation turns positive nearing the third decade of the lives of hotels indicating a vintage effect. Thus, a V-shaped obsolescence function emerges that either may be explained by a fixed-cost renovation expenditure function or a vintage effect produced by the demand for surviving assets. A series of tests of hotel brand-specific obsolescence rates reveals considerable variation in these rates among seasoned properties, perhaps an indication of a convex renovation expenditure function and sequential follow-on investment. Copyright Springer Science+Business Media, LLC 2007

Suggested Citation

  • John Corgel, 2007. "Technological Change as Reflected in Hotel Property Prices," The Journal of Real Estate Finance and Economics, Springer, vol. 34(2), pages 257-279, February.
  • Handle: RePEc:kap:jrefec:v:34:y:2007:i:2:p:257-279
    DOI: 10.1007/s11146-007-9011-4
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    References listed on IDEAS

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    1. Colwell, Peter F & Ramsland, Maxwell O, Jr, 2003. "Coping with Technological Change: The Case of Retail," The Journal of Real Estate Finance and Economics, Springer, vol. 26(1), pages 47-63, January.
    2. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-838, May.
    3. Murphy, Kevin M & Topel, Robert H, 2002. "Estimation and Inference in Two-Step Econometric Models," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(1), pages 88-97, January.
    4. Joseph T. Williams, 1997. "Redevelopment of Real Assets," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 25(3), pages 387-407, September.
    5. Breusch, T S & Pagan, A R, 1979. "A Simple Test for Heteroscedasticity and Random Coefficient Variation," Econometrica, Econometric Society, vol. 47(5), pages 1287-1294, September.
    6. Allen C. Goodman & Thomas G. Thibodeau, 1998. "Dwelling Age Heteroskedasticity in Repeat Sales House Price Equations," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 26(1), pages 151-171, March.
    7. Brent C Smith, 2004. "Economic Depreciation of Residential Real Estate: Microlevel Space and Time Analysis," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 32(1), pages 161-180, March.
    8. Clapp, John M. & Giaccotto, Carmelo, 1998. "Residential Hedonic Models: A Rational Expectations Approach to Age Effects," Journal of Urban Economics, Elsevier, vol. 44(3), pages 415-437, November.
    9. K.C. Wong & George Norman, 1994. "The Optimal Time of Renovating a Mall," Journal of Real Estate Research, American Real Estate Society, vol. 9(1), pages 33-48.
    10. George W. Blazenko & Andrey D. Pavlov, 2004. "The Economics of Maintenance for Real Estate Investments," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 32(1), pages 55-84, March.
    11. Stephen E. Margolis, 1981. "Depreciation and Maintenance of Houses," Land Economics, University of Wisconsin Press, vol. 57(1), pages 91-105.
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    Cited by:

    1. Jack Corgel & Crocker Liu & Robert White, 2015. "Determinants of Hotel Property Prices," The Journal of Real Estate Finance and Economics, Springer, vol. 51(3), pages 415-439, October.
    2. Michael J. Turner & Chris Guilding, 2010. "Accounting for the furniture, fittings & equipment reserve in hotels," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 50(4), pages 967-992, December.
    3. Eli Beracha & William G. Hardin & Hilla Maaria Skiba, 2018. "Real Estate Market Segmentation: Hotels as Exemplar," The Journal of Real Estate Finance and Economics, Springer, vol. 56(2), pages 252-273, February.

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