Hospitality Investing News - Southeast February 2024

The Latest in the Southeast Hospitality Market

Core consumer prices based on the Consumer Price Index (Core CPI), which is the metric being more closely monitored by the FOMC, showed an annual increase of 3.8% in February. This comes after 3.9% increase in January. Both are nearly double the Fed’s expected target of 2% and both were above economist expectations and forecasts. This lead the FOMC to keep the benchmark interest rate between 5.25%-5.50%.

The good news, the FOMC still feels that it doesn’t need to raise interest rates any further and still feels that three interest rate cuts totaling around 0.75%-1.0% are expected to occur this year. The bad news is this means interest rates are going to remain higher for longer. This is causing many hoteliers who believe the slowdown they might be experiencing in their hotels as just a momentary blip and that hotel performance should stabilize in a quicker timeframe. However, while the economy still boasts new all-time highs in the stock market, low unemployment, and wage earnings exceeding inflation, consumer sentiment remains low. Many consumers haven’t seen a meaningful change in prices on everyday necessities and many are still struggling to pay monthly bills, being reflected in increasing credit card debt balances. As a result of these inflationary pressures on consumers, many hotels are seeing increases in revenues, mainly from inflationary increases in ADR, yet might not be aware that this is having little to no impact on the hotel’s value. Given that most, if not all, of this increase is being absorbed by rising operating expenses and, therefore, not translating to an increase in Net Operating Income (NOI), and in some cases even reflecting a lower Net Operating Income. Additionally, many franchises’ property improvement plans (PIP) are getting costlier and stricter, which won’t necessarily result in a dollar for dollar increase in value, given the abovementioned situation of hotel NOIs. All this said, re-stabilization is most likely going to take longer than hoteliers are expecting. Even then, hotel NOIs might fall short of expectations. As the adage says, past performance is not indicative of future results, meaning the road ahead could be trickier than the roads hotel owners have trekked in recent years.