The Inverted yield curve – lopsided predictor?

The hotel industry, particularly in New York, has motored along oblivious of the concerns many economists have with an inverted yield curve – a phenomenon where long term rates are lower than short term rates. Historically, the inverted yield curve served as a simple and fairly accurate predictor of a recession. With such a differential in rates, the incentive for more traditional bank debt to be put out for development – hotels and others – diminishes.

Yet, there is more money sloshing around the Big Apple than are viable projects particularly with inventory rising rapidly. And the appetite for more development remains strong as is the desire to acquire property. Tuesday’s dive in the stock market spurred in part by the man who came up the idea of “taking the punch bowl” when the party gets out of control (Alan Greenspan), in retrospect, looks like a storm in a teacup considering the modest recovery of yesterday. For an industry that lives by the day given the perishability of room sales, most operators appear not to have noticed the mini-financial storm. The substantial growth in inventory in markets like New York is, in the end, very likely going to haunt the last entrants to the seemingly relentless economic expansion when it slows down or comes to a halt. At that point developing mid-market hotels at 400K plus a key is likely to look unviable for more than a few owners – as George Santayana said “those who cannot learn from their history are doomed to repeat it”.

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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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