PERSPECTIVE
OF INTEREST
WHAT INTEREST RATE CUTS REALLY MEAN FOR HOTEL REAL ESTATE .
Contributed by CHARLOTTE KANG , MANAGING DIRECTOR , NATIONAL PRACTICE LEAD – HOTELS & HOSPITALITY , JLL VALUE & RISK ADVISORY
I n March 2022 , the Federal Reserve began aggressively raising interest rates as part of its strategy to combat inflation , a trend that continued into early 2024 . At the September 2024 Federal Open Market Committee ( FOMC ) meeting , the Fed lowered interest rates by 50 basis points , easing monetary policy for the first time in four years since COVID-19 . Then , in December , the Fed lowered its key interest rate by a quarter percentage point , its third consecutive reduction , to a target range of 4.25 % -4.5%, which is back to the level where it was in December 2022 when rates were on the move higher .
This article will explore the potential impacts of interest rate cuts on hotel transaction volume , portfolio sales , cap rates and development .
TRANSACTION VOLUME Between 2016 and 2019 , total U . S . hotel transaction volume ranged from $ 24.5 billion to $ 34.2 billion . The COVID-19 pandemic caused a sharp decline in 2020 , with volume plummeting to $ 8.1 billion , followed by a strong recovery to
$ 39.6 billion in 2021 . Despite a mid-year slowdown , 2022 finished strong at $ 42.5 billion , approaching the 2015 peak of $ 45.7 billion . However , elevated interest rates led to a significant decline in 2023 , with volume dropping to $ 23.6 billion . As of Q3 2024 , transaction volume has remained nearly flat , with JLL ’ s Hotels and Hospitality Group ’ s projections indicating a slight increase by year-end compared to 2023 .
Lower interest rates make borrowing less expensive , which can stimulate hotel acquisitions . With Secured Overnight Financing Rate ( SOFR ) forecasted to fall to 3 % during the 2025-2027 period , the expectations of more rate cuts will further bolster investor confidence . As a result , transaction volume should accelerate . The biggest opportunity will be in the $ 75 million to $ 200 million single-asset deal tranche , which has been basically negligible over the past 18-24 months , as this segment is most susceptible to high rates .
PORTFOLIO SALES Portfolio sales have significantly declined in recent years . From 2015 to 2019 , they represented between 28.4 % to 43.3 % of total transaction U . S . volume . This trend continued into 2021 and 2022 , with portfolio sales accounting for 41.9 % and 32.7 % of total volume , respectively .
A clear correlation emerges between low transaction volumes and reduced portfolio sales . In 2020 and 2024 ( through Q3 ), the years with the lowest total volumes , portfolio sales dropped to just 22.6 % and 8.3 % of total volume , respectively . This decline is particularly striking in 2024 , where portfolio sales have almost disappeared , making up only $ 1.25 billion of the $ 14.97 billion total volume .
The data suggest a cyclical nature to portfolio sales . As overall transaction volumes increase , portfolio sales will likely once again play a significant role in driving market activity , potentially returning to the higher proportions seen in more active market years .
CAP RATES Historical data show cap rates generally move in the same direction as SOFR / LIBOR . Though interest rate reductions
36 hotelsmag . com Jan / Feb 2025