Hospitality Capital Markets Update: October 16, 2024

Written by Katie Vivian, Hotel Loan Originator

Key Takeaways from the 2024 Lodging Conference

Interest Rates:

Hoteliers have observed no significant changes in the hotel lending rate environment following the Federal Reserve’s rate cuts. Most lenders base their pricing on U.S. Treasury yields, which can fluctuate independently of the Fed’s actions. Strong demand for financing and elevated credit risk in the hotel sector also influence rates. Additionally, there is often a time lag in the market’s response to changes in monetary policy.

Demand Trends:

After ten months of decline, U.S. demand has rebounded, particularly in the Top 25 markets and the Northeast. Record levels of air travel and transient demand have contributed to this uptick. While luxury and upper upscale segments are performing well, lower-tier hotels face challenges due to economic factors. The average daily rate (ADR) is expected to rise most significantly in higher-end hotels. HVS projects minimal improvement in occupancy and ADR for 2025, with occupancy stabilizing at 62.8% and ADR increasing from $158.11 in 2024 to $161.27 in 2025.

Travel Recovery: 2024 Lodging Conference

Domestic leisure travel has surpassed 2019 levels, while business travel is expected to reach those levels by 2025. Transient leisure accounts for approximately 55% of occupancy from January 2022 to August 2024.

Financing and Construction Outlook:

Lending is anticipated to rise due to significant pent-up capital. The U.S. construction pipeline has reached an all-time high of 6,095 projects, totaling 713,151 rooms—a year-over-year increase of 523 projects and 53,090 rooms. Extended-stay properties account for 39% of the pipeline. However, inflation and rising development costs, along with higher interest rates, have slowed project progress.

• New construction is primarily viable in key submarkets with high ADRs and strong demand.
• The renovation and conversion pipeline remains robust, with 2,007 projects and 262,178 rooms, driven by brand refresh demands and owners assessing brand value.

The prevailing sentiment at this year’s Lodging Conference was “cautiously optimistic.” While the industry shows signs of recovery and growth, ongoing economic uncertainty—particularly concerning inflation and interest rates—poses challenges that hoteliers must navigate strategically. Largo is well-positioned to assist hotel owners, leveraging our expertise and strong lender relationships to provide valuable guidance in the capital markets.