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 this marketplace, opportunities exist for those who are willing to adjust their strategy.
In many ways this is familiar ground for hospitality. While larger hotel groups have tapped into development budgets to self-fund projects and move forward with construction that is already underway, the rising cost of debt will almost assuredly put some hoteliers’ development aspirations on ice.
Learning how the rate increase is affecting the hotel industry will be very important over the next few months. Understanding its effects will help guide owners to understand how to get available development projects back on track.
Finding ways to plan around the increased cost of debt will require hoteliers to monitor their costs very closely over the next six to eight months. Success at this point is determined by how well you can time your reentry into construction.
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 they are comfortable with. Keeping open communication between hotel owners, operators, designers and contractors will be a major component to realizing the success of a development project in the next few years.
Additionally, owners should become accustomed to the current lending environment, as it is undoubtedly closer to typical levels than what the industry has benefited from over the last eight to 10 years. While the industry was riding high on a successful streak of lower rates year after year, businesses quickly grew accustomed to cheaper debt that was not going to sustain itself forever. As a result, many hoteliers built business models that relied on lower rates without anticipating a return to past “normality.”
It can be a challenge for hoteliers to be fully aware of what is and what is not impacted by these rate hikes. 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 necessary projects.
Some projects will be placed on a temporary hold, or simply go silent due to rate increases. The number of mortgages consumers applied for over the past year has been significantly reduced, however that number will stabilize as prices start to level.
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; as hotels start ramping up occupancies and rates to pre-pandemic levels, it a sure sign our industry is building again.
Stephen Siegel is principal of H-CPM (Hospitality CPM).
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