SPECIAL REPORT
in June or July .
From the buyer or investor ’ s perspective , the 200 +/ 1 basis point increase in interest rates ( and climbing to 7 % -plus ) is a real cost and therefore factored into pricing and thus cap rates . Unless the asset is unique and in a “ target ” market , they believe values are off 10 % to 15 %. Many with cash have decided to just take a “ pause ,” hoping that the opportunities in the next two to three years will be to acquire distressed assets or bank loan sales .
Regardless , transaction activity will slow down in all segments as buyers take a pause to determine what the new normal is and how to make money . Robert Hecker , Horwath HTL , Singapore : I ’ m not so sure higher interest rates will add to any distress already out there . More likely , it added more to the buyers ’ costs and thus to the buyer-seller price gap . The sales that are occurring are generally not associated with distress as pricing is rather robust ( more like pre-COVID levels ). The driver seems to be positive attitudes / outlooks about travel and hotel performance recovery and plenty of equity-seeking investment . Assets being sold / bought tend to be full-service hotels , good locations , prime assets . Charles Human , HVS , London : It ’ s looking inevitable that there will be stress in the market , which will lead to some degree of distress . In Europe , there is usually a lag between the onset of this and any distressed selling that may result . So , for the time being ( at least the remainder of this year and probably Q1 next year ), we expect to see relatively low levels of activity as investors take a wait-andsee approach . Right now , it ’ s the uncertainty combined with the high cost / low availability of debt that are stalling activity . J . Pedro Petiz , Avington Financial , London : Higher rates have quickly arrived and become the new normal for the foreseeable future as part of central banks ’ fight against inflation in the aftermath of a decade of highly dovish monetary policy . Historically , the hospitality industry has been resilient to inflation . However , higher interest rates over an extended time typically results in increased capitalization rates and pressure on real estate asset prices . Andrew Broad , RobertDouglas , San Francisco : It is inevitable that rising interest rates will lead to rising cap rates . The question becomes whether hotel net revenues can at least keep pace with inflationary pressures , including the cost of capital , as opposed to falling behind .
For example , consider that a hotel that had US $ 1 million NOI in 2021 might have sold for a 7 cap , or roughly US $ 14.3 million . Now , let ’ s say this same hotel produces US $ 1.3 million NOI in 2022 , but cap rates widen to 9 . Since the hotel value is around US $ 14.3 million , this means that NOI has to increase by 30 % to maintain the January 1 , 2021 , value . But if this hotel only increases NOI to US $ 1.1 million , with cap rates having widened to 9 , its value is now only US $ 12.25 million , which represents a 15 % loss in value . So , in an inflationary climate , treading water is not good enough in terms of maintaining valuations .
Leisure , drive-to markets and extended-stay properties continue to perform well and have the greatest likelihood of pacing to inflation . However , markets and assets are different . Valuations can ’ t be simply derived from NOIs and cap rate calculations . More general factors like current cost of capital , anticipated market growth , barriers to entry , diversity and prospects of demand drivers , as well as property specific factors like needed capital for CapEx , preventive maintenance or brand-mandated property improvement plans , all factor into valuations .
Overall , we expect new construction and development
HISTORICALLY , THE HOSPITALITY INDUSTRY HAS BEEN RESILIENT TO INFLATION . HOWEVER , HIGHER INTEREST RATES OVER AN EXTENDED TIME TYPICALLY RESULT IN INCREASED CAPITALIZATION RATES AND PRESSURE ON REAL ESTATE ASSET PRICES .
– J PEDRO PETIZ
66 hotelsmag . com Jan / Feb 2023