05/05/2023
How does the recent Fed rate increase affect hotel sales?
Earlier this week, the Federal Reserve approved its tenth interest rate increase in just over a year. This decision raised the benchmark borrowing rate by 25 basis points (0.25%), bringing the prime rate to 8.25%––but for hoteliers looking to buy or refinance their property, lenders’ rates could end up being nearly 10% or more.
This increasing cost of debt in turn decreases loan-to-value ratios, which decreases the price that buyers are willing to pay for an asset. The result is a growing gap between seller and buyer expectations regarding a property’s value––which could substantially slow down transaction volume.
However, these variables have had a negligible effect on the Ohio hotel market due to a few factors:
1. Properties in Ohio tend to be much more competitively priced than properties in larger markets, like New York or California
2. Development is accelerating across the state, particularly in metro areas like Dayton and Columbus, which brings a growing need for housing and short-term accommodation
3. The impact of a rate increase is marginal for an economy brand as opposed to a luxury brand––and Ohio tends to favor more economy and mid-tier brands
The Fed has signaled that it plans to slow rate increases in the coming months, which may ease the burden for hospitality investors across the industry. In the meantime, though, the Ohio hotel market remains active and proves ready to weather the storm.
