TRENDING : BISNOW EVENT
Interest rates weigh on hotel transactions , but capital ready to pounce
By DAVID EISEN
WASHINGTON , D . C . — Higher interest rates make it tougher to buy or build hotels , but as the Federal Reserve signals that it could remove its heavy foot from the pedal , buyers and developers could be in a position to have their checkbooks ready .
The Fed since March 2022 has raised rates in succession in order to curb inflation — it ' s currently to a range between 4.75 % and 5 %— but there are signs that it could start to back off . “ We are much closer to the end of the tightening journey than the beginning ,” said Loretta Mester , president of the Cleveland Fed , on April 20 .
Any signal that interest rates will abate is soothing for investors on the lookout for assets . It was a topic of discussion at the recent Bisnow Lodging Investment Summit , where leaders of the hospitality industry converged at the Hilton Washington DC Capitol Hill .
Inflation is a two-way street for hoteliers . On the one hand , daily leases allow operators to change hotel rates on a nightly basis . This dynamic pricing gives hoteliers the ability to keep up with both supply and demand changes , but also fluctuations within the broader economy .
“ Right now , hospitality is the best bet against inflation ,” said Marc Magazine , executive managing director at Savills Hospitality Group . “ Daily rates can change every day to keep up with inflation .”
Unlike 2020 , when no one was traveling , the past two years have been gangbusters for hotels , specifically resorts , extended-stay properties and others in so-called “ drive-to ” markets , benefitting from pent-up leisure travel demand . Concurrently , there has been a smaller amount of new supply entering markets , giving operators further cover to raise rates .
Magazine pointed out that people are traveling right now , but does that mean hotels are an investment opportunity ?
Part of hospitality ' s allure is it benefits as an inflation hedge , said Adi Bhoopathy , managing director of Noble Investment Group . It ' s one reason why investing in hotels is attractive . “ Hotels are yielding assets ,” he said , “ and it ' s why there are new entrants coming into the space , buying into the yield , but you need to have a strong capital market to execute .”
The capital markets are anything but stable now , with investors playing the wait-and-see approach . “ The tick up of interest rates has slowed down sales , but people have cash to spend ,” said Magazine .
34 hotelsmag . com June 2023