Alternate Financing Options for Hoteliers in 2024
By Shivan Perera SVP of Participations & Debt, AVANA Companies | February 2024
On Wednesday, December 13th, the Federal Reserve opted to maintain its key interest rate for the third consecutive time, signaling a cautious approach amid easing inflation and a resilient economy. The FOMC, with unanimous agreement, decided to keep the benchmark overnight borrowing rate within the targeted range of 5.25%-5.5%.
Despite the decision to maintain the current rate, committee members outlined a plan for potential future adjustments, indicating a likelihood of at least three rate cuts in 2024. Many expect these cuts to occur in quarter percentage point increments. This decision is a slightly more conservative stance than the market had anticipated, yet more assertive than previous official indications. This shift may signal positive news for the hotel industry.
Here, we break down the impact of these expected rate changes across different areas of the market.
Interest Rates and Available Capital
There's favorable leverage as CAP rates align positively with loan rates, making hotels more appealing to lenders anticipating liquidity in 2024. Comparatively, Industrial, Multifamily, and Retail sectors are highly rate-sensitive. Hospitality, however, has some ability to dynamically price ADRs in response to inflation. Despite valuations taking a hit, the data shows that NOI performance remains resilient.
Looking ahead to 2024, hoteliers could expect an increase in available capital, but most likely, it will be from private credit lenders rather than banks, particularly if there is a projection-based element to the deal. Additionally private credit lenders may serve as an option to help transition borrowers with maturing debt to a lower rate interest rate environment. Responding to loan volume declines in other sectors, lenders can channel new originations towards hotels due to the advantageous cap rates and continued robust operating performance. This trend is likely to persist unless there are substantial fluctuations in interest rates or cap rates in alternative asset classes, many of which are highly rate sensitive.