Most economists agree that a soft landing is imminent despite uncertainty about future rate cuts. What remains to be seen, however, is the glidepath to that landing. The final approach to a 2% inflation target has proved to be difficult and long.
Against the backdrop of the hotel industry, the challenges associated with higher interest rates are present on two fronts.
First, interest rate risk remains a standing issue as rates reset from deals that originated in 2020 and 2021, leading to margin compression. Second, hotels face higher costs as they try to finance overdue property improvements. It has been a tumultuous few years for the industry, and these risks present challenges for many hoteliers.
Financing Challenges for Hoteliers
The primary challenge hoteliers have right now is the ability to service debt. Many smaller and economy hotel/motel owners are under variable rate financing tied to prime rates and paying what some would consider (in the not-too-distant past) "hard money" rates. The mid-scale and upper-scale owners face looming rate resets or expiring rate caps. The cash in refinance is a novel concept and a challenge that many hoteliers will face. Owners who are unprepared or betting on rate cuts may be in for a rude awakening. Borrowers must be ready to bring in equity to make deals happen.
A secondary challenge for hoteliers is the deferred PIPs that are now due. Franchisors were lenient during COVID, given the economic environment. However, now there is a significant need to finance large overdue PIPs. Many hoteliers were forced to use reserves to carry their properties through COVID, leaving them ill-capitalized to fund improvements and franchisor-mandated PIPs. Many hoteliers are returning to their lender and refinancing senior debt to include PIP proceeds, but they are also getting hit with higher interest rates. As a result, many projects aren't going to pencil, forcing borrowers to either throw the keys back to the lenders or sell the asset.
Read full article: https://www.hotelexecutive.com/business_review/7916/navigating-economic-turbulence-financing-challenges-and-opportunities-in-the-hotel-industry
