Between rising interest rates and the current threat of growing inflation, hoteliers with development goals are once again wondering if now is the time to borrow money to renovate or start new builds. Industry leaders are understandably in a rush to commence construction after more than two years at nearly a standstill, and many have grown accustomed to the availability of inexpensive debt throughout the past business cycle.
In many ways this is familiar ground for the hospitality industry. While larger hotel groups have tapped into development budgets to self-fund projects and move forward with construction that is already underway, the rising costs of debt will almost assuredly put some hoteliers’ development aspirations on ice. Learning how the rate increase is impacting the hotel industry will be very important over the next few months. During that period, it’s important for hoteliers with development aspirations to continue through the design process and clarify their needs for when the market reaches a level of stability that they are comfortable with.
In the current lending environment, owners should become accustomed to this new normal rather than what the industry has benefited from over the past eight to 10 years. This will undoubtedly be a challenge for some hoteliers and the cost of acquiring debt may have become prohibitive for some acquisitions, along with rising labor and materials costs. This situation is likely to provide hoteliers with reasons to delay product improvement plans, renovations and other projects
Some projects will be placed on a temporary hold or simply go silent due to rate increases.
With projects starting to slow down, work crews will be available for the projects that have available funding today as labor and material costs start to stabilize. Hoteliers can be at ease that we as an industry are no longer contending with untamed, rapid increases in materials costs, providing developers the means to execute on projects in the near term. This makes for an attractive market for opportunistic investments and with the right timing a project could find itself pulled off the shelf to begin breaking ground.
It’s important for owners to stop looking at the rate hike as a long-term issue and accept it as a return to reality. The hospitality industry has been so inundated with uncertainty that it’s easy to lose sight of familiar trends. High costs or not, take a look around and as hotels start ramping up occupancies and rates to prepandemic levels, it is a sure sign our industry is building again.
Stephen Siegel is principal with H-CPM.