U.S. interest rates continue to make headlines, and many hoteliers are left wondering what it means for the industry at large.
While the 10-year treasury yield fell from 3.1 percent in June to 2.8 percent in July, it’s starting to creep back up. The yield now flirts with reaching 3 percent again. In June, the Federal Reserve raised interest rates and uncertainty over several factors—including the Bank of Japan’s decision that could send bond yields higher, a president who criticizes rate hikes, and an expectation that the central bank will tighten credit and then raise interest rates—is causing many players to watch closely. Especially in an industry that has seen 100 consecutive months of year-over-year revenue-per-available-room growth, according to STR.
For its part, the U.S. economy appears to remain strong, increasing at the fastest pace it has since 2014 during the second quarter and hitting 4.1-percent growth. By comparison, the annualized rate of gains in gross domestic product was 2.2 percent in the first quarter. Meanwhile, consumer spending increased 4 percent and nonresidential business investment jumped 7.3 percent. All of that growth sets up the Fed for at least two more interest-rate hikes, one in September and one in December, according to sources.
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But even so, July brought forth some good news for people borrowing money with interest rates not climbing as quickly as expected. That, coupled with the fact that banking regulations have become more relaxed under a new administration, has made the industry ripe with construction activity.
“The Trump administration has pushed for some relaxation on the Dodd-Frank regulations, particularly on small banks,” Jack Corgel, managing director at CBRE Hotels’ Americas Research, said in a recent video discussing U.S. hotel trends in July. “A lot of construction loans are generated by small banks, local banks. Therefore, there is a bit of a lift in potential for more construction loans to be issued. At the same time, labor is very difficult to put into these projects and other costs are rising. There are positives and negatives, which would be influencing construction activity.”
U.S. hotel supply was up 2 percent year-to-date through June, according to STR. As of June 2018, the U.S. had 5,146 hotels with 603,673 rooms under contract in the pipeline. Of those, 1,417 projects with 186,832 rooms were under construction.
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But interest-rate uncertainty has long been on the industry’s radar. Rising rates will create pressure on the market, with buyers scrambling to lock in lower rates and sellers trying to leverage rates to maximize pricing, according to Peter L. Nichols, national director, National Hospitality Group for Marcus & Millichap.
Meanwhile, concerns about inflation and rising interest rates have driven volatility in equity markets, according to Marcus & Millichap’s “2018 Hospitality North American Investment Forecast.” That has caused investors to worry that rising rates will eat at their returns because higher borrowing costs have the potential to cut into profits.