Special Edition of Lodging Insights: Federal Reserve Rate Increase

/Special Edition of Lodging Insights: Federal Reserve Rate Increase

Special Edition of Lodging Insights: Federal Reserve Rate Increase

|2016-12-20T15:20:19-04:00December 20th, 2016|

Mark Woodworth and Jack Corgel give their reaction to the Federal Reserve’s rate increase and share their opinion on what it means for the lodging industry.

The Federal Funds rate lies on the front end of the yield curve. Changes in this rate resulting from direct actions by the Federal Reserve affect changes in other short-term interest rates by similar magnitudes. Rates further out on the curve however are less responsive to changes in the Federal Funds rate, a situation Chairman Alan Greenspan who was once frustrated by this unresponsiveness described as an ‘interest rate conundrum’. Other monetary policy methods can be introduced to influence rates along the longer segment of the yield curve. In the absence of these policy actions, long rates will fluctuate with trading based on expectations for future economic growth and inflation.

With this backdrop, hotel market participants should not count on capitalization and interest rates moving in concert with changes in the Federal Funds rate. Instead, there should be recognition that policy actions targeting the Federal Funds rate happen because the Federal Reserve believes the economy is strengthening; thus long rates will systematically follow a resetting the Federal Funds rate on their own schedule. The path from a reset Federal Funds rate to a reset of Treasury long rates to a reset of hotel market rates is complicated. Statistical analyses linking changes in Treasury long rates to important property market rates need to hold other factors constant that influence property market rates. An analysis was recently completed that correlates hotel capitalization rates with 10-year Treasury rates.1 A brief summary of the findings is provided.

Holding other important factors constant (i.e., risk premium, property income growth, and credit availability), the model estimated here indicates that a 100 basis point positive change in the 10-year Treasury rate has on average produced a 28 basis points uptick in hotel capitalization rates. With hotel capitalization rates currently in a range of 7.0 to 8.5 percent and an expected slow pace of interest rate changes the modelled outcome suggests that hotel capitalization rates will remain fairly stable for the foreseeable future.

For CBRE’s analysis on the Federal Reserve’s interest rate increase, click HERE.

1 To download and read Jack Corgel’s full study, “The Effect of a Rise in Interest Rates on Hotel Capitalization Rates”, click HERE.

About CBRE

CBRE Hotels is a specialized advisory group within CBRE providing brokerage, valuation, consulting, research and capital markets services to companies in the hotel sector. CBRE Hotels is comprised of over 375 dedicated hospitality professionals located in 60 offices across the globe.

Contact: R. Mark Woodworth

mark.woodworth@cbre.com??????????/+1 404 812 5085

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