The Federal Reserve’s decision to raise interest rates will make financing a bit more expensive, but those in the hotel industry see the move as an overall positive development.
REPORT FROM THE U.S.—The U.S. hotel industry is greeting the news of a 0.25% increase in interest rates as a necessary inevitability that holds the promise of some positive movement.
That the Federal Reserve raised interest rates yesterday for the first time since December 2015 came as no surprise to anyone. Weeks or even months ago, companies already had worked the then-speculated 0.25% increase into their upcoming budgets.
In the books
From an underwriting perspective, Hospitality Ventures Management Group has been figuring the new interest rate into its plans for acquisitions and new development for several weeks now, said Mary Beth Cutshall, SVP of acquisitions and business development. Many anticipated this move, she said, and it’s already been baked into valuations.
The effect the interest rate will have depends the property and the market, she said. It affects underwriting, cost of debt, exit assumptions for the buyer and property values, she said. Construction loans are still quite difficult to obtain, she said, and the rising interest rate will probably push leverages, which means more equity will be required.
“It may put more compression on getting construction done,” she said.
Financing will be a little more expensive now, said Jatin Desai, chief investment officer at Peachtree Hotel Group. While there will be some effect on pricing, he said, he’s overall optimistic about the industry as a whole. The country’s gross domestic product tracks with revenue per available room closely, he said. The rates are an overall indicator of the economy, and the economy has grown, he said.
“An increase in rates should signify an increase in overall GDP, so hotels should benefit from that,” he said.
Although rates increased a quarter point, he said, it’s not something that should move markets dramatically. There’s nothing to be alarmed about, he said.
If any group in the real estate industry has the opportunity to capitalize on the rate hike, it’s the hotel business, Cutshall said. Rising interest rates can affect consumer spending and confidence, she said, so everyone will be watching that closely. One way to offset any possible negative fallout is to adjust average daily rate, she said.
“We’re hearing consistently through experts and economists that no one is expecting there to be a rapid acceleration of multiple interest-rate increases,” she said. “It’s likely to be slow and steady. That should help.”
Kevin Davis, managing director at Jones Lang LaSalle, said from his company’s perspective, the surprise is the significant sell-off in the treasury market following the presidential election.
“The 10-year treasuries are approximately 70 basis points higher than they were on the day of the election,” he said.
Donald Trump winning the election was a surprise, he said, and the view on the market is Trump will promote strong pro-growth policies, such as lower taxes, less regulation and a large infrastructure plan.
Bonds and investors are selling off because these policies could potentially create a more inflationary environment, he said.
From a borrowing perspective, immediately prior to the election a company could get a fixed-rate loan near the low 4%, he said. Now rates are close to the 5% to 5.25% range, he said, which is a significant move in a short amount of time.
Similarly, in October 2015, LIBOR was at 18 basis points, he said; now, it’s about 65 basis points. Though over a longer period of time, it’s still a pretty significant increase, he said.
The Fed has announced its intention to raise rates three times in 2017, Davis said. Assuming it’s another 0.25% increase each time, that’s another 75 basis points theoretically on LIBOR.
Davis said he doubts the higher rates will constrict consumer behavior at this point because they remain historically low. There’s strong consumer confidence, he said, and the unemployment rate is about 4.6%. When there’s a strong labor market, there’s typically strong consumer confidence, he said, and in such an environment, there are frequently higher rates, which counterbalance inflationary pressures.