Inflation was supposed to have been contained by now, but despite recent interest cuts in Europe, the UK and by the Fed in the US, inflation remains persistently above government targets. The inflationary impact, plus Donald Trump's threatened tariffs with China, Canada, Mexico and inevitably Europe, remain unknown as do concerns that key western economies could slide into a period of higher inflation and little to no growth, more commonly known as stagflation.
These questions are fuelling a sell-off in government bonds, which is driving yields higher in the US and a handful of the larger European economies. In the US, 10-year Treasuries have surged half a point to near 4.7 per cent. Options trading suggests the rate could surpass 5 per cent, which would be the highest since October 2023. In the UK, the yield on the 30-year gilt has touched 5.25 per cent, surpassing the post-mini-budget peak to hit the highest level since 1998.
“The Federal Reserve began cutting its short-term banking rate in September when inflation was at 2.4 per cent, and expectations were for some further deceleration. however, inflation has continued to rise in recent months, and in January, consumer price inflation increased to 3 per cent. This will delay any rate cuts by the Fed this year until there are clear signs that either inflation is trending toward 2 per cent or the economy begins to face net job losses,” US-based National Association of Realtors Chief Economist Lawrence Yun says.
“Meanwhile, the 10-year treasury yield and mortgage rates have not followed the trajectory of the Fed’s rate cuts since September. Instead, mortgage rates have been trending modestly higher over the past five months,” he adds.
If stagflation emerges, so will fresh challenges for the hotel sector, potentially impacting profitability, cost structures, the types of guests travelling, and their debt burdens.
European hotel returns and stagflation
European hotels’ revpar growth will decelerate to low-single-digit in 2025 from mid-single-digit in 2024, Fitch Ratings predicts, with asset-heavy hotel operators facing more challenges in protecting their margins as pricing power moderates, while inflationary cost increases continue.
It believes that leisure travel, the largest segment, is likely to remain flat as anticipated improvements in European consumer real wages and incomes in 2025 will not be sufficient for a resurgence in leisure spending.
“European hotel operators increased their profitability above pre-pandemic levels thanks to strong pricing power. However, as the market stabilises, Fitch Ratings expects asset-heavy hotel operators, such as Whitbread and AccorInvest, to face more challenges in protecting profit margins than asset-light groups such as Accor,” says Fitch Ratings Senior Director, Corporates Anna Zhdanova.
The former are exposed to significant labour, rent and food and beverage costs, Zhdanova points out. The UK is particularly challenging because of weaker revenue growth than some other major European markets, while minimum wage rises and higher national insurance contribution rates will make it difficult to maintain hotel profit margins, even for those companies with cost-cutting programmes.
“Hotel real estate has returned a substantial amount over the past five or six years, but that is also during a period of negative cash flows, many restructurings and a substantial amount of capital investment into the properties. So, is that really a return metric? Hardly, in my opinion,” Ryan Meliker, co-founder and president at Lodging Analytics Research, noted in a recent LinkedIn post.
He added that both asset light models and real estate ownership have seen positive returns but caveated that roughly 85 per cent of the typical hotel's costs are inflation-driven, so hotels that can keep costs under control will have an advantage. But if weak growth and rising interest rates happen at the same time as spiking costs for construction, labour, and operations, it may have unpredictable effects on hotel portfolios.
Consumer confidence and spending
“Inflation rates in Europe have been coming down but they have been stickier in services mainly because of wage increases,” says Martina Bozadzhieva, director for macro and investor services Oxford Economics. “But on the positive side, people’s spending tends to respond quite quickly to higher wages, especially in the UK. However, not everyone is feeling those benefits and confidence may delay that rate of recovery.”
However, she predicts that with savings rates declining slower in Europe from their post-pandemic highs compared with the US, where most savings have now been spent, people will still have the budgets to travel, despite the economic challenges.
“The high visitor rates we have experienced from the US will normalise, but for example in the UK we expect to see tourism up between 6.0-6.2 per cent this year,” she adds.
Another risk of stagflation may be that institutional investment in hotels could become more cautious. Years of ultra-low rates have pushed sovereign wealth funds, pension asset managers, and private equity firms to accept riskier assets to make up for their loss of income in safer instruments.
If stagflation reversed the performance of their portfolio companies and certain corporate debt instruments, investors might have to revert to defensive strategies for portfolios allotted to hotel investment, potentially pushing down hotel valuations. More positively, leverage could help giants such as Wyndham, Marriott, and Hyatt – all of which have increasingly adopted asset light strategies – to opportunistically acquire brands to bolster their market share.
Construction slowdown amid uncertainty
The current impact appears to be primarily a slowdown in construction, in part because of higher costs and in part because of market caution around the numerous variables at play.
Certainly among markets outside of the US, construction figures for 2025 suggest flat or declining development according to CoStar’s pipeline data. In Europe currently 171,294 rooms are in construction, the same as in 2024, while final planning of 86,438 rooms is down over a fifth and planning at 163,184 rooms is down 8.6 per cent.
Asia Pacific is more mixed with construction up 4.9 per cent at 511,666 rooms but final planning for 47,241 rooms down a huge 57.6 per cent and planning at 396,598 rooms by contrast up 36.4 per cent. Similarly, in the Middle East and Africa figures are variable with construction (104,572 rooms) off 6.7 per cent and final planning (28,875 rooms) is over a fifth down but planning for 94,056 rooms is ahead 17.1 per cent.
Those numbers suggest investors are becoming increasingly wary about the possible drag in profitability of stagflation taking hold in 2025. While the central banks are likely to push forward with further rate cuts, the depth and frequency is far less predictable.