Post-pandemic economic conditions throughout the world have been marked by surging inflation, sharply increasing demand for many goods and services, and changing employment levels. Balancing the effects of inflation with growth and employment has challenged governments the world over, with political consequences in many countries, including the United States, where persistently high prices are widely considered a key factor in voters’ decision in November to return Donald Trump to the presidency in 2025.
In the U.S., a key lever in economic management is the interest rate set by the Federal Reserve, which chair Jerome Powell for an extended period was reluctant to reduce for fear that doing so would accelerate inflationary pressures. Business travel suppliers have cited several consequences to the decision to maintain the interest rates before cutting them in September and November, particularly restrictions on funds available for hotel construction.
It also likely was one factor, along with aggressive regulation, in limiting industry merger and acquisition activity. Although a few big deals were announced in 2024, the past few years hasn’t featured the feverish pace of some pre-pandemic years. Meanwhile, American Express Global Business Travel last month cited higher interest rates as a drag on small and midsized client travel demand, with CEO Paul Abbott suggestingthe rate cuts would “improve confidence with small-to-midsized businesses as we go into 2025.”
But among the most notable consequences of the decision to maintain interest rates before September was the impact on hotel supply. Elevated interest rates, along with high construction costs, had in many cases made securing financing for building new hotels difficult or undesirable. Earlier this year, the U.S. extended-stay supply growth rate was at its slowest pace in a decade, according to the Highland Group.
Large hotel companies in recent years have looked to conversions to fuel their growth—consider IHG Hotels & Resorts’ new midscale conversion brand, Garner, as one example. Still, the limited supply expansion that elevated interest rates helped shape allowed hoteliers on average to hold the line or increase room rates even as occupancy levels stagnated.
When developers began to sense interest rates would drop, some optimism regarding new starts increased—Lodging Econometrics suggested that “as interest rates begin to decline, projects scheduled to start in the next 12 months will move to under construction rather quickly. Nevertheless, STR parent CoStar Group this month noted interest rates for loans for new hotel construction remain high, as do costs, which could still hinder widescale new U.S. supply.
Powell’s Fed may not be done in 2024 yet, though: 90 percent of 103 economists polled recently by Reuters predicted the Fed would cut interest rates again this month.
