Hotel Sector Impacts if the Fed Cuts Interest Rates

23.08.2024 - 22:57 / skift.com / Sean Oneill / Seth Borko

A cycle of interest rate cuts could start as soon as September, according to comments Friday by Jay Powell, the chairman of the U.S. Federal Reserve: “The time has come for policy to adjust,” Powell said.

After more than two years of elevated rates, the hotel industry is optimistic that cuts could spark a rush to negotiation tables, speeding up acquisitions, hotel development, and refinancings.

“A Fed rate cut cycle could help stabilize the economy, which would be a boost to both consumer and business sentiment,” said Seth Borko, head of research at Skift Research.

Here are 9 likely impacts on the hotel sector.

An interest rate cut in September will be positive for the market in two respects, according to Kevin Davis, group Americas CEO at JLL Hotels & Hospitality, an investment advisory firm that has helped trade more than $83 billion in hotel assets in the past five years.

“First, it will improve the investment return math,” Davis said. “Second, and perhaps more importantly, it will improve investor psychology, leading to a greater willingness to buy and sell assets.”

Any additional cuts later in the year could “significantly jumpstart investment activity,” he said.

Last year, global hotel transactions hit their second-lowest volume in a decade. Only the 2020 pandemic year was worse, according to JLL.

High interest rates have prompted many buyers and sellers to wait. Dealmakers signed only $50.5 billion of hotel transactions last year, compared with $77.8 billion in 2019.

“We certainly hope and anticipate that the rate cut will result in more hospitality transactions that pencil and provide a small measure of relief to existing owners with floating rate loans,” said Mark Rutter, attorney, at the global hospitality and leisure practice group at law firm Paul Hastings.

Some investment analysts speculate that in-play assets could include Marriott International’s 20 remaining hotels, which it would like to sell to become as asset-light as possible.

Lower interest rates can lead to lower debt servicing costs, which can benefit the bottom line of a hotel operator.

A case in point: Apple Leisure Group, a real-estate investment trust that owns about 225 hotels, estimated earlier this year that an interest rate cut of 1 percentage point (100 basis points) would boost its annual net income by $1.5 million a year.

That gain to its bottom line would be representative of what many hotel asset owners would enjoy.

One caveat: Gains from lower interest rates may be partly offset by rising operational costs elsewhere. Record-high property insurance costs, partly due to extreme weather caused by climate change, have pinched hotel cash flows, primarily in top gateway markets, said CBRE Research.

On the construction