Hotel Deals Plummet, Development Pauses
High interest rates and debt costs put the brakes on new projects for now.
The hotel sector has enjoyed a vigorous recovery but that may be changing with hotel deal volume dropping 70% year-over-year, according to CoStar Group. Just as worrisome for future trends, the high interest rates have taken a toll on new development in this sector as builders pause on planned projects.
As an example, construction on a hotel-casino Dream Las Vegas fully stopped, according to local media cited online due to the developers’ stalled financing plans, which caused them to owe tens of millions of dollars for the project. The project, developed by Shopoff Realty Investments, broke ground last year on Las Vegas Boulevard. The developer said construction will begin again once the terms of the financing are finalized.
And according to another report this past April, construction appeared stalled at 255 West 34th Street, a 33-story hotel towel in Midtown New York City, due to a $481 million loan default by a former developer.
Overall, quarterly hotel deal volume declined sharply in the second quarter of this year to $3.5 billion from the same time frame last year. And it was also down 49% from that period in 2019, before the pandemic hit and caused travelers to stay home and staycation.
Questionable seems to be the outlook for what may happen over the rest of the year. According to the CoStar report, it said, “it is hard to envision a catalyst that will jump-start transaction volume, short of the Fed announcing an interest rate decrease.”
Specific numbers make the hotel picture clearer. Only 150,000 hotel rooms were underway in May, compared to 212,000 rooms being built in early 2020.
At the same time, the report carries some optimism that development should restart once the Fed signals that rate hikes have stopped. And some markets may bode better for new projects than others, including local and regional ones where developers can find construction financing from regional banks with which they have had long-standing relationships. But even that is questionable as the report added, “those will be few and far between.”