The hospitality market is tightening for Atlanta’s hotel owners as costs to operate properties rise due to interest rate increases prompted by the Federal Reserve.

As anticipated summer demand approaches an end, the measures taken to counteract widespread inflation weigh heavily upon some of the highest-ranking players in the hotel industry, which could inspire a drop in the rate of production for the remainder of 2023 into early 2024.

Helen Zaver, senior vice president at Colliers International, said interest rate hikes affect hotel owners in all stages of the purchasing process, including those currently seeking government-backed loans to build as well as those with SBA loans already in place.

“I think it’s a change that’s going to affect all hotel owners,” Zaver said. “(Cash flow for hotels) has changed drastically.”

As a result, plans for future hotel construction projects may be postponed or abandoned entirely. Additionally, existing hotels unable to pay off outstanding loans may be pressured into foreclosure. However, construction projects already in motion are still expected to come to fruition.

According to Colliers’ hospitality report for the second quarter of 2023, 781 rooms await completion in the state’s hotel development pipeline, all of which are on track to be finished by the end of the year. The same report states that an additional 3,316 rooms are slated for completion in 2024. Regardless, Georgia’s hotel market saw only half the new supply added in the second quarter of 2023 compared to the second quarter of last year.

Investors have slowed in backing new developments as well, likely discouraged by the ongoing instability. Zaver said that transactions concerning investors have reached lows not seen for a few years, but investors’ participation in new projects should amplify once interest rates find equilibrium.

Customers should also expect to feel the weight of these hikes, as the rise in rates is anticipated to reflect in hotels’ charges for stays. Colliers’ quarterly report states that Georgia’s revenue-per-available-room metric has increased 1.7% year-over-year, despite occupancy levels decreasing 1.3% over the same period of time. Zaver also said that owners may be prompted to drive up prices for rooms in order to make up the difference.

“Rates have increased to compensate for the increased costs of running a hotel, and that comes all the way from labor to supplies,” Zaver said. “Just everything overall has gone up.”

Despite the shared financial strain experienced by owners, labor demand is high across various positions in the hospitality industry and will likely remain elevated so long as unemployment remains relatively low.

However, the chances of the regional and state markets reverting to pre-pandemic behavior seem unlikely. Still, Zaver said interest rates are expected to stabilize in the coming months, which would motivate owners and investors to partner in bringing more hotels to the state and region. A decrease in building costs would also speed up construction for pending projects, helping satisfy metro Atlanta’s demand for more hotels even more rapidly.

“I think as costs of construction come down some, then you will start seeing more supply starting to get built up,” Zaver said. “But right now, new supply is very limited for hotels because of that cost factor. So, I think we are at a new normal.”