Hi, welcome to another Coffee Time Chat
As is customary when we have Dr Don joins us, we love to delve into his wealth of knowledge, and financial expertise, to hear his views on the current state of the hotel industry.
His track record speaks for itself and, keeping his fingers closely on the pulse, he is well placed to assess the health of the sector.
The heart still seems to be beating strongly with continuing demand, but will this carry on or melt away?
Let’s find out.
You can see a summary of the points below 👇🏻
Really hope you enjoy the conversation 👍🏻
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🎞 VIDEO CHAPTERS
00:48 Guest welcome and topic intro
02:28 Let’s keep it simple, we live in a complicated world
07:50 Cap Rates
10:55 Are we starting to see a resistance to higher room rates
18:22 Impact on higher interest rates
23:24 Is anyone talking recession
28:08 Are there any sectors that are of particular interest
34:30 Further videos and subscriber link
Below is a summary of the points highlighted:
- 83% of Lodging Industry Investment Council members surveyed this month predicted that Hotel acquisition Capitalization Rates are rising.
- The capital markets are disjointed, and the cost of financing is high. There’s a realization, reconciliation, and rationalization that must occur. We should see more transactional activity in 2024.
- According to Reuters, U.S. hotel owners could see greater pressure on their ability to service the loans backing their properties.
- There is a decline in leisure stays coupled with rising costs.
- According to Fitch Ratings, as the surge in travel after the pandemic wears off, demand is shifting away from pricey leisure stays and towards lower-rated group business travel.
- According to a Moody’s report, nine of the 19 CMBS loans that liquidated in the second quarter of 2023, 47%, were hotel loans that initially defaulted in 2020, selling at a loss after the borrowers failed to work out a solution to avoid default.
- According to Fitch Ratings, they anticipate slowing leisure demand and lower rates that will decrease hotel revenue growth.
- Fitch anticipates a mild recession in the first six months of 2024, which would likely weaken leisure travel demand even further.
- Rising labor, energy and insurance costs will further erode the cashflows of hotel owners.
The greatest cost burden for hotel owners stems from insurance rates, especially hotels in areas most exposed to climate chaos, where hurricane, flood and windstorm insurance premiums increased 2-3x.
- The Federal Reserve has declined to raise interest rates further, following a recent spike in July, but signaled that another rate hike could come before the end of the year
- The market quickly priced in the “higher for longer” interest rate outlook following the release of the Federal Reserve’s updated economic projections
- The central bank is now promising an interest rate of at least 5.1% at the end of 2024, but interest rate futures are pricing at a 4.65% rate
- Pundits’ points to three main reasons for the discrepancy:
- Optimism over inflation;
- Pessimism about the job’s market; and
- Uncertainty within the Fed.