What Rising Interest Rates Mean for New Commercial Development

HSF's Vice President of Capital Markets Mike CanningHALL Structured Finance (HSF) Senior Vice President of Capital Markets Mike Canning discusses the relationship between rising interest rates and hotel and multifamily new construction. While rising interest rates present many challenges and setbacks in the market, they are just one of the factors that influence new commercial development.

 

What Does the Interest Hike Mean?

The Federal Reserve announced its second consecutive interest rate hike of three-quarters of a percentage point, taking the borrowing rate up to a range of 2.25%-2.5%. While this increase will create a big ripple effect, it is just one of the many factors that go into building a new project, some others being the cost of capital and construction and the projected return on construction.

Although rising interest rates make deals more challenging, the hospitality industry is uniquely positioned to minimize the impact of its borrowing cost with its ability to adjust the cost of a hotel room each night. This could potentially lead to the construction of more hotels as they can recover the costs more easily. While it’s harder to recover the borrowing cost for multifamily projects due to year-long leases, in many markets the demand for housing is high enough that year-over-year rent growth creates more room to absorb the higher interest rates. The high cost of construction today is the most likely to slow the rate of new construction or place projects on hold, but overall, both the hospitality and multifamily industries are positioned to perform well despite these challenges.

Opportunities in Every Economic Cycle

Hotel construction came to a halt during the height of the pandemic in 2020, but the industry has been showing real signs of recovery. In fact, according to PwC, with the strength of average daily rooms rates, U.S. hotels are expected to surpass 2019 RevPAR levels this year. Lenders such as HSF are optimistic and are seeing an influx of hotel projects coming back into the space even as interest rates continue to increase.

As liquidity in capital markets gets tighter for the hotel industry as the year progresses, there will be more opportunities for non-institutional lenders to provide construction loans, acquisition financing, and capital for renovations, all at a higher leverage point than traditional bank financing.

HALL Structured Finance’s Approach  

While we are being thoughtful about the projects we finance and the borrowers we work with, we are looking to finance nearly $1 billion in construction loans and bridge loans in the hotel, multifamily, industrial and office sectors this year.

As an entrepreneurial private lender, we can be more creative in finding solutions for our borrowers during this time. HSF is also one of the few proven hotel construction lenders in the industry and will continue to offer more flexibility than a traditional bank lender as regulations and interest rates continue to increase over the next several months. My one piece of advice to developers today would be to work with lenders that have experience in the space during these market challenges and that have a proven track record.

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