Piloting High Hotel Interest Rates: Past Trends and Future Outlook

In recent months, it has become increasingly evident that interest rates may remain elevated for a prolonged period. This trend poses significant implications for hotel financing. Investors, who may have hoped to delay deals until rates returned to lower levels, now face the reality of making financing decisions in this high-rate environment. This article delves into historical hotel interest rate data and the Federal Open Market Committee’s (FOMC) projections to provide a comprehensive overview of current and future trends in hotel financing.

Understanding Interest Rate Trends

To forecast future debt pricing, it’s essential to analyze historical hotel mortgage data. HVS has reviewed data from the American Council of Life Insurers (ACLI), which includes loans on high-value, credit-worthy assets. Additionally, HVS maintains ongoing discussions with market participants and monitors hotel mortgage terms across the industry. The following chart illustrates interest rate trends from 1997 to the most recent year, reflecting a range of rates rather than specific points.

The Myth of “Normal” Interest Rates

Historically, the idea of a “normal” interest rate is a misconception. Federal funds rates have fluctuated significantly due to macroeconomic events, such as the 9/11 attacks, the Great Recession, and the COVID-19 pandemic. Although hotel interest rates have been somewhat less volatile, they generally follow the Fed rate’s trend line without indicating a stable “normal” period.

Interest rates on specific mortgages are influenced by various factors, including the risk profile of the asset, leverage, repayment terms, and borrower creditworthiness. Typically, the range for rates on 80% of hotel assets spans 100 to 150 basis points. This variability underscores the absence of a standard rate environment.

Rate Spreads and Correlated Indicators

The spread between hotel interest rates and the Fed rate tends to widen during rate cuts and narrow during rate increases. While hotel rates are influenced by the Fed rate, they are more closely linked to other investment rates, such as average-A corporate bond yields and U.S. Treasury bill yields. Hotel mortgage rates are often quoted as spreads over the Secured Overnight Financing Rate (SOFR) or Treasury yields, which are also influenced by the Fed rate.

Looking to the Future

The FOMC provides forward-looking guidance on the targeted federal funds rate. As of March 20, the targeted “long-run” rate was 2.5–2.75%, representing a neutral rate that neither stimulates nor restricts economic growth. Historically, the Fed has alternated between stimulating rates post-crisis and restrictive rates during periods of strong growth. This guidance offers some insight into potential future hotel interest rates.

Given historical trends, it is unlikely that hotel interest rates will return to the low levels observed between 2013 and 2021. Investors needing to secure loans soon should not overly focus on timing the interest rate market. Those with current low rates through 2025 might benefit from delaying new financing, but waiting also risks facing another macroeconomic crisis that could drive rates lower.

Strategic Financing Decisions

Investors must navigate these complex dynamics when making financing decisions. While higher interest rates pose challenges, they also present opportunities for strategic investment and refinancing. Understanding the interplay between the Fed’s policies, historical trends, and current market conditions is crucial for making informed decisions in this evolving landscape.

Conclusion

As the U.S. hotel industry adapts to a prolonged period of higher interest rates, investors and stakeholders must remain agile and informed. By analyzing historical data and the Fed’s forward guidance, we can anticipate future trends and make strategic decisions that align with the evolving financial landscape. Stay tuned for further updates as we continue to monitor and analyze these critical trends in hotel financing.