What Higher Interest Rates Mean for Hotel Deals

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1:00Hey everybody, it's your hospitality friend Glenn here at the lodging conference. Where I found my friend Ryan Bosch of a Reba Capital. But before we learn what's happening out there with those interest rates. Yeah, you know it. You know you want to know. Want to think of friends over at Actable? Actable, they give you the power to profit. Do me a favor, check them out at Actable.com. All right, so big question. What's going on? What's new? What's different since the last spoke. I'm trying to think of one last time you spoke. I don't think it's only a buy. I think it was Hunter. Maybe it was in NYU. I don't know what's been let me rephrase that. How about the last few months? What's been going on? All right, so last few months we've seen treasuries explode over 100 basis points higher. Right? So higher interest rate environment, how that translates. Right? I think this morning I looked at was 5.36. Last I looked and you look at that. That's your risk free rate. So you could go park your money in treasuries at 5.36 versus hotels. At an eight cap that math starts getting hard. So what's going to happen over the next couple of months? We see acquisitions, you know, quieting down a little bit until I think people see where this ends up.

2:03Where rates shake out. And at the same time, you've got a very flush debt market. Right? That's what everyone's been talking about last couple of years. That's what we're seeing on our side. It's going to get tougher for them to put out that capital. So hopefully this overlining is we see a little bit of spread compression. Well, these rates stay elongated. Now like I feel like I understand what all of that meant. But let's see if I actually do understand what all that meant. The one thing that I don't really get is how do like treasury bonds and stuff like that. And I understand that they're like over 5%. And I also heard and understand that last summer it was like this was very much pre-great recession and all that song stuff. But how does that directly tether to interest rates? How's that work? I thought it was more like the Fed says, hey, we're going up, we're going down. And then everybody adjust accordingly by x%. So they've got two key benchmarks to watch. Right? On floating rate debt, you watch what the Fed's doing directly correlates to software. I mean, on fixed rate debt, which is what you see prevalent and permanent finance and for stable. Like when I did for my mortgage at home.

3:03Exactly. Yeah. Typically ties a spread above a treasury. And that's where it fixes at the time of closing. So most bank finance and what we see in the market right now, CNBS financing, all correlates to those treasuries more than they do often so for. And again, 100 basis points in the last month that went up. And that just kind of like changes everybody's attitude whether or not they're going to want to do deals because something that might have been profitable in August isn't the same today. No, particularly it said against the uncertainty with fuel prices and everyday supplies. Of course. And but then the other side of that also is you've also have a lot of hotels that are, you know, going up for refinance. Right. That math just got harder. So we might see some more properties hit the market because of that. We're refinancing gets more challenging. It aside now's the time to sell versus refining. Yeah, that makes a lot of sense. And so, but what we're really saying is it's not a one size fits all scenario. It depends where you are with the property of what your, the life cycle is of what you think that investment is going to be.

4:05And a lot of fundamental factors that kind of play into it. So I think what I hear you saying is that generally speaking while the market seems to be tougher on one. There's another layer of people that will probably be forced to make some decisions that will keep the market moving. Exactly. And I think that's the silver line. Yeah. If you're looking at it from the outside. All right. So last thing I have to ask you, everybody talks about interest rates interest rates interest rates. It gets very tiring that I say this over and over again. But the one thing I say is before the great recession interest rates were so much higher to begin with. How does that play into the attitude of investors today and the whole concept of we've changed a generation of people that are going to be able to get the market. So that's the generation of people to expect something cheaper. And things are just different now. Well, I think that interest rates also affect value. Yeah. If you're looking at how much money can I make off of a property. What you're paying in debt service is a factor in that. So, you know, when interest rates were much higher historically, property value is very much lower. Now we're at this point where it's like where's the get, right? If the same yield isn't there on an asset that I would have bought a year ago that it is today.

5:08Is it worth the same price? Right. And I think that's the part that takes time to work. It's way through the market. Fashion day. Well, thank you for educating me and educating all of you. Hopefully out there. A lot of this stuff is a little bit more complicated. And I got to be honest with you. I've been in this business 30 years and I still don't understand it. Because if I was, I'd be down there on the floor making deals instead of talking to him about deals. Anyway, check out our friends over to reap a capital. I'm Glenn. He's Ryan. And thanks so much for watching. We'll see you next time. Business is booming. Is your fulfillment ready for peak season? Switch to shipstation now and handle more volume with confidence when it counts. Shipstation connects Shopify, Amazon, TikTok Shop, and over 200 more integrations with one platform that does it all. You can manage orders, sink inventory, track returns, all automatically. Everything your operation needs, all in one place. Right now, qualified shippers get a real dedicated person to get used, set up, and switched over for free. So when peak season hits, you're ready to go. Switch today at shipstation.com, Code Audio.