Interest rates

Reflections of rising inflation, interest rates on securities –

It has been 40 years since the US economy saw a dramatic rise in inflation and interest rates. Countless Americans who have never experienced such a period worry about rising prices. Over the past two years, many of them have been recipients of economic impact payments from the government. The government’s massive monetary stimulus to combat the negative financial effects of the pandemic has resulted in an overstimulated economy, fueling an unprecedented consumer spending spree and resulting spike in inflation. Despite all the concerns about rising prices, consumers continue to spend lavishly, suggesting that higher inflation may be on the horizon.

In the first quarter of 2022, earnings for many publicly traded hotel companies beat expectations as post-pandemic travel, particularly leisure demand, continues to recover. While occupancy rates generally continue to lag, average daily rates achieved in the US are now consistently above 2019 record highs, paving the way for a robust recovery and inflation hedge for hotel investors. Additionally, the strong pace of discounted and future corporate and group travel bookings point to a broad and robust recovery in the accommodations industry, albeit with headwinds from rising labor costs. work, high energy prices and escalating geopolitical conflicts.

Slowing the rise in inflation through targeted increases in interest rates, which is now an important policy priority for the current administration, has been complicated by the unknown effects of the war in Ukraine. Either way, tight monetary policy and rising interest rates are inevitable for the rest of this year and possibly next.

Theoretically, rising interest rates put upward pressure on capitalization rates which reflect a weighted average cost of debt and equity. However, other factors, including the change in net income, also affect accommodation property prices.

Given daily room rentals and the science that allows for continual repricing of units, many hotels can grow revenue as quickly, if not faster, than operating expenses increase. Additionally, an unprecedented amount of domestic and foreign investment capital raised since the start of the pandemic for the U.S. lodging industry remains sidelined and under pressure to deploy, with some now ready to accept. reduced yields. Finally, many large, high-quality, full-service and convention city hotels and resorts in the United States continue to trade below replacement cost, which is generally attractive to buyers.

While the influence of rising inflation and rising interest rates creates new challenges for the lodging industry, in the short term, investment in U.S. hotel real estate is expected to remain desirable and at attractive valuations.