Inverted Yield Curve and the hotel market

The Wall Street Journal has a report on the steadily rising voices of Cassandras who are predicting (or at least loudly hinting) at a recession next year. But like most economists the nay sayers are hedging their bets and merely pointing to a variety of storm clouds on the horizon ranging from high gas prices and the latest conflagration in the Middle East. Other troubling signs as they see it are a declining housing markets and a slight dip in retail sales.

Since December last year, the pessimists are strident in pointing to a time tested market – the inverted yield curve when the spread between long and short term rates narrows and the “yield” on long term treasuries are less than short term bonds. Lenders usually turn off the spigots. But oddly, none of that is as yet seen in the market for hotel loans. In fact, another article in today’s Journal points to a robust hotel market with purportedly limited hotel supply.

So what is the real story? The answer is that there is none as essentially many experts and economists rely on combination of data from the past and hunches. In fact, the NBER (national bureau of economic research), the body that makes the call on a recession upon noting the peaks and troughs that frame it always does so after the fact. According to them, the current expansion began in November 2001. Given the extensive development cycle in greenfield projects, it is virtually impossible to “time” the process. The best any hotel developer can do is to build it with the expectation that any dip will be just that – a shallow contraction that presages renewed growth. The inverted yield curve, in six months, has, so far, confounded most observers – certainly hotel development has continued oblivious of it. In many markets, such as NYC, that may well be the right decision.

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Vijay Dandapani

Co-founder and president of a New York based hotel company for 24 years. Grew the firm to five hotels in Manhattan and also developed a greenfield project at MacArthur airport, New York. Speaker at numerous prestigious forums including Economy Hotels World Asia, Lodging Conference, NYU, Columbia University Real Estate Roundtable, Baruch College's Zicklin School and ALIS. President and ceo of New York City Hotel Association since January 2017.

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