Global inflation and rising interest rates have some hotel investors and developers considering adjusting their strategies. Others, however, point to the current success of the hotel industry in the summer months as reason to shrug off the increased costs.
Acquiring loans in the United Kingdom’s hotel industry has become more tenuous and expensive due to cost pressures, high wages and the threat of a recession, HNN’s Terence Baker reported from the UKHospitality Summer Conference in London.
Some investors, including Risk Capital Investors Owner Luke Johnson, fear the looming recession.
“Companies should be raising money to protect themselves. In the U.K., we have higher inflation, and we have a worsening currency against the dollar. … When the top line softens, we’ll see the weakest profits in living memory, or losses,” he said.
Getting a loan in the United States isn’t much easier right now. Ben Leahy, partner at London-based property investment firm Cedar Capital Partners, said while U.S. banks are still giving out loans, the rates are increasing and the terms are tightening, HNN’s Dana Miller reported from the 2022 Boutique Hotel Investment Conference.
Leahy said there’s been an increase in base rates over the past 60 to 90 days.
“I think that interest rate dynamic that’s been evolving, plus some lenders having concerns around recession, could generally cool the hotel financing market,” he said.
Rising interest rates are further increasing the cost of debt for hotel developers and presenting headwinds for those already dealing with increased construction and transaction costs due to supply-chain disruptions, HNN’s Bryan Wroten reported.
“The goal is to slow down that inflation and slow down the overall economy without going into a heavy inflationary environment with a recession,” said Mat Crosswy, president at Stonehill Strategic Capital.
David Pollin, co-founder and co-president of the Buccini/Pollin Group, said the rate increases have created a newfound uncertainty around the economy and interest rates being low.
“You can't fight the Fed, and every capital market participant, especially on the debt side that we're dealing with, is saying they've already told us what they're going to do,” he said. “We don't know if they're actually going to do it, but we have to be prepared.”
Even with the rising rates causing uncertainty among some developers and investors, the U.S. hotel industry is on pace to have record demand in June and the highest U.S. monthly demand ever recorded by STR, CoStar’s hospitality analytics firm, STR’s Isaac Collazo reported.
“During the week ending June 18, U.S. hotel performance strengthened further with occupancy at a pandemic-era high of 71.8%, which was up 1.2 percentage points from the prior week and 4.1 percentage points versus the matching week last year,” Collazo reported.
Some U.S. hotel investors cite the summer uptick in demand as reason to believe the effects of inflation won’t hinder the industry’s performance successes, HNN’s Stephanie Ricca reported from the NYU International Hospitality Industry Investment Conference.
Ashford Hospitality Trust president and CEO Rob Hays said lodging real estate investment trusts are trading below net asset value and considering alternative capital more.
“What’s interesting is that typically when the Fed raises rate, you see that while rates go up, spreads typically come down, and that’s not happening right now,” Hays said. “So even though you’re seeing volatility associated with the geopolitical environment and inflation … you’re just ebbing and flowing as best you can. It will come down eventually over the next few months.”