Where are we in the recovery cycle? Are we at the top yet? More than likely, we are still somewhere on the way up.
Regardless of where the hotel industry is on the road to recovery, there is one word of caution: the low interest rates that have ruled for the last five years are sure to come to an end, and in fact, they’re slowly creeping up. Interest rates cannot stay at historical low levels forever.
While these bargain-basement rates have meant low-cost money, higher rates may actually be good for business. Lenders make more profit as interest rates rise, so they’re more likely to make money available; they want your business.
Fed actions earlier this year resulted in a rise in rates, which sent a signal that historically low rates will soon be gone. Though the increase struck panic in the markets at first, the market has absorbed the rise in basis points of 50 to 100, and a loan at 5 percent interest – OK, it’s not 4 percent anymore – is still a good deal. Keep this in mind that now is a great time to refinance your existing loans.
If you’re acquiring an existing hotel property, keep a keen eye on the market. It is real estate 101 but worth reminding everyone of again: don’t buy at the top of the market, particularly if you’re venturing into the hotel field for the first time. As we saw happen in 2006 and 2007, buying at the peak of the market means you lose your value when the market crashes.
The same holds true for developers with experience in new-build. Keep an eye on the market. Developers, especially ones with a track record, who can find loans or are flush with cash should be looking to build during a down market. They are used to the risks of new-build, like longer lead-time and ramp-up, so they can take advantage of the lower development costs such as labor and supplies that mark a depressed economy.
The bottom line is no matter which side of hotel development you’re on, proceed with caution and strike while the iron is hot. Sound contradictory? That’s the nature of an entrepreneurial market. And there’s no better time to get in on the action.
By: Greg Morris