WASHINGTON, D.C. – U.S. President Donald Trump declared a U.S.
economic emergency on Wednesday and announced tariffs of at least 10% for countries
across the globe with even higher rates for 60 countries or trading blocs that
have high trade deficits with the U.S.
The potential impact on the hotel industry will likely
include a near-term chilling effect on travel as global stock markets act
adversely to the news. The cost of build, renovating and converting hotels will
also increase as the cost of goods is expected to increase.
R.W. Baird’s Michael Bellisario put out a note on Thursday
morning stating near-term net unit growth is at risk for the public companies, including
a lower level of domestic signings and starts as well as elongated development
timelines and delayed openings.
“Also, transaction activity has remained slow, which could
negatively impact conversion,” Bellisario wrote. “Net, net – construction costs
will be higher as a result of the bigger-than-expected reciprocal tariffs, and
the ROI on development (and renovation) projects, which already had been under
pressure, will be lower.”
He added that signings and starts could slow over the near
term given heightened macroeconomic and trade policy uncertainties; projects'
opening dates are likely to slip as well.
“We have come across various estimates, but internationally
sourced hard costs (materials) and FF&E, which are primarily imported from
China and Vietnam (reciprocal tariffs set at 34% and 46%, respectively),
represent ~15%-20% of a development project's total budget,” Bellisario
continued. “All else equal, the cost to build a hotel could be ~5%-10% higher
now (on top of the 20% tariff that was already in place for goods sourced from
China). More key money could help fill some of that gap for developers to make
the math pencil, but the more likely outcome is that fewer projects will get
signed and started over the near term, in our opinion.”
Bellisario further opined that some of the public hotel
company giants could actually gain relative share given their strong brands and
benefits of size, scale and distribution.
China was hit hardest by Trump’s tariff announcement. The second
biggest exporter to the U.S. behind Mexico will now face a 54% tariff and has
vowed to retaliate. Canada and the EU are also preparing countermeasures.
The question remaining is how impactful the tariffs will be
with global economists fearing a global recession?