Hospitality Investing News - Southeast May 2024

After months of positive news of decreasing inflation, inflation is proving to be stickier and more stubborn hovering around the high 3% in the most recent reports. Inflation is important to hotel owners for several reasons. Firstly, it is what the FOMC has decided to let guide their decision-making for setting the benchmark rate, particularly Core CPI. As recently as December and January of this year, the FOMC seemed confident that inflation was headed in the right direction towards their 2% target and that interest rate cuts were highly probable and could start as soon as March. Obviously, that has not been the case. It is still early to gauge how the FOMC will go from here. Experts seem to keep postponing when we will see the first interest rate cut with every inflation report that comes out. Many are now saying we won’t see any until as far out as September of this year and with some saying that interest rate hikes might come back on the table.  Secondly, inflation more directly impacts hotel values because hotels have more operating expenses than most commercial real estate operations. While many markets are continuing to see increases in ADR, occupancies are slipping as consumers are feeling more and more the cost of everyday goods going up forcing them to be more choosey about how they travel, how much they travel, and for how long. Many hotel owners are waiting on interest rate cuts, the election, and/or even further cooling of inflation to make business decisions and maximize their hotel values. The truth is interest rates are the canary in the coal mine when it comes to lower hotel values. The real culprit of depreciating hotel values is lowered net operating incomes (NOI) due to the combined effect of what was described above – increased operating expenses and revenues decreasing due to slipping occupancy. This doesn’t even factor in the new brands being rolled out, cost of property improvement plans exceeding reserves, or the continued rippling effects of COVID on corporate travel.