Some Challenges to Hotel Development Ease as New Ones Arise

While some factors are easing the constraints on hotel construction, new hotel projects are facing challenges earlier in the development process.

The cost of capital to build hotels has increased significantly since the Federal Reserve began raising interest rates in March 2022. Even before the interest rate increases, lenders interested in hotel projects had stepped back to watch how the industry's recovery from the pandemic panned out.

Higher interest rates complicates financing for new projects, requiring owners to put in more equity or have enough cash flow to support those higher rates, said Jan Freitag, national director of hospitality market analytics at CoStar.

“When you are were thinking of it at a 3% or 4% environment and suddenly, you’re at an 8% or 9% environment, that matters dramatically to the developer,” he said.