“Hotel Deals on Ice? Rising Rates & Tight Credit Reshape 2025’s Investment Landscape”

The hotel investment landscape is entering 2025 with a mix of cautious optimism and undeniable headwinds. While macroeconomic conditions suggest a positive trajectory for overall dealmaking, hotel property sales are facing significant challenges. Rising long-term interest rates, tight credit conditions, and ongoing valuation recalibrations are slowing transactions and putting pressure on both buyers and sellers. Hotel owners, investors, and general managers must navigate these turbulent waters with strategic foresight and a firm grasp of financial realities.

The Interest Rate Dilemma: A Double-Edged Sword

Interest rates, both short- and long-term, play a critical role in hotel financing. While the Federal Reserve initiated rate cuts in September 2024, the yield on the U.S. 10-year Treasury note remains above 4.5%, nearly a full percentage point higher than before the Fed’s policy shift. This divergence has two distinct effects:

Short-Term Rate Relief: Hotel developers seeking construction loans benefit from declining short-term rates, as borrowing costs for new projects become more manageable.

Long-Term Rate Pressure: Investors evaluating acquisitions face rising long-term rates, increasing the cost of capital and eroding asset valuations.

Greg Friedman, CEO of Peachtree Group, warns that the hotel acquisition market will remain challenged due to these financial constraints. The result is a more selective, strategic approach to deal making, with fewer large-scale transactions occurring at pre-pandemic volumes.

A Looming Debt Maturity Wall

One of the most pressing concerns for hotel owners is the significant volume of single-asset loans set to mature by the end of 2026. Many of these loans were originated under historically low interest rates, and their refinancing will come at a much higher cost.

Loan Replacement Challenges: Owners must secure new financing at elevated rates, increasing debt service costs and compressing profit margins.

Limited Lender Appetite: Regional and local banks, which were once key financiers of hotel projects, have become more risk-averse. Their weakened financial positions post-pandemic have made them hesitant to extend credit, particularly for hospitality assets perceived as volatile investments.

Michael Bellisario, senior research analyst at Baird, notes that many hotel owners are choosing to hold onto assets rather than refinance at unfavorable rates, reducing the number of transactions in the market.

The Valuation Conundrum

The interplay between cap rates and the 10-year Treasury yield is a critical factor in hotel valuations. Historically, hotels have commanded higher cap rates, currently hovering around 8-9%, which offers some insulation against valuation declines. However, as interest rates rise, the cost of borrowing increases, pressuring asset valuations downward.

Friedman predicts that hotel values will need to recalibrate further before transaction activity picks up. This dynamic creates a disconnect between buyers and sellers, as sellers hold onto pre-pandemic valuations while buyers demand discounts to reflect current market realities.

Development Costs and Project Delays

Even as short-term interest rates provide some relief, rising construction costs continue to be a deterrent for new hotel projects. Labor shortages, supply chain disruptions, and inflationary pressures are driving up costs, making new developments less attractive.

Anthony Capuano, CEO of Marriott International, underscores that the primary obstacle to new construction is not just interest rates but the availability of debt. Many projects remain "shovel-ready" but lack financing to move forward. In this environment, only well-capitalized developers with strong banking relationships can push projects through.

Shifting Investment Strategies: A Focus on Smaller Hotels

In response to market constraints, investors are shifting towards smaller, mid-scale, and extended-stay hotels, which offer lower capital requirements and quicker returns. Brands like Marriott’s StudioRes, Hilton’s LivSmart Studios, and Wyndham’s Echo Suites Extended Stay are gaining traction among developers looking for resilient investment opportunities.

As Bellisario explains, larger full-service hotels in major metropolitan markets, such as New York or San Francisco, face greater financing challenges. Meanwhile, smaller-scale projects in high-demand markets are more viable. Investors with capital to deploy are favoring a strategy of multiple smaller projects over a single large-scale development.

Regional Variations: Where Are the Opportunities?

Hotel deal making prospects vary significantly by region. Sunbelt states such as Florida, Texas, and Arizona continue to attract investor interest due to strong demand and resilient RevPAR (Revenue Per Available Room) performance. Conversely, markets like Portland, Minneapolis, Baltimore, and San Francisco are experiencing more distressed sales, as weak demand and economic uncertainty weigh on valuations.

Looking Ahead: Strategies for Hotel Investors and Owners

With these challenges in mind, hotel owners and investors must adopt a pragmatic approach to deal making in 2025. Here are three key takeaways:

• Adapt to New Valuation Norms: Expect further recalibration of asset values. Sellers should align pricing expectations with market realities to facilitate transactions.
• Secure Alternative Financing Options: Explore non-traditional lenders, such as private equity firms and institutional investors, to bridge financing gaps.
• Prioritize High-Demand Segments and Markets: Focus on mid-scale and extended-stay segments, as well as high-growth regional markets with strong fundamentals.

While deal activity may remain subdued in the near term, strategic investors who navigate these headwinds effectively will find long-term opportunities in an evolving hospitality landscape.