Sellers are still pricing hotel deals like it's 2021. Buyers are pricing them like it's 2026.
What changed isn't just price. Lenders and equity investors now understand hotel volatility better than ever before, thanks to robust data from platforms like CoStar and Kalibri Labs, the industry's proven consistency relative to other real estate sectors, and the strong recovery from 2020. Underwriting is sharper. Storytelling is harder. The math has to work on paper, not just in pitch decks.
Interest rates and return expectations have stabilized
Interest rates, the first bellwether of any deal, are holding steady at around 6%. While this isn't exceptional, it's far from prohibitive. Historically, hotel loan rates range from 4% to 10% across cycles. At 6%, rates appear stable, and when combined with slightly reduced equity return expectations, the blended rate sits around 7%.
Opportunity investors who once demanded 18% returns now find 15% acceptable. Here's how the math works on a $15 million deal with $10 million in debt and $5 million in equity. A 6% loan with a mezzanine debt piece or equity at 9% can deliver a 15% return on equity if the fundamentals support it. In year one, the interest-only payment on the $10 million first mortgage is $600,000. The hotel, with 80 rooms at 72% occupancy and a $150 nightly rate, generates $3.15 million in revenue. Net income before debt should land around $1,050,000. After debt service, $450,000 remains to be returned to investors at 9%. The first-year feasibility goal is met.
Deals must work today, not tomorrow
The biggest challenge? Construction and renovation costs have never been higher, and revenue growth isn't robust enough to justify optimistic projections. A deal must pencil with today's actual numbers, not a feasibility study's best-case scenario.
Whether lenders evaluate debt-service coverage ratios or debt yield, the numbers can't "just make it." They must exceed benchmarks by a wide margin. This often requires more equity and accepting lower-than-desired returns.
The good news: The deals that do clear today are cleaner, better capitalized and more defensible than anything we saw during the cheap-money era.
The story behind the deal
If you're acquiring a hotel, there has to be a compelling story behind it. Maybe management was unprofessional, and you're fixing it with a disciplined plan. A franchise change could unlock better performance, or a strategic renovation could reposition the asset. Maybe new demand generators are entering the market, and you got there first. Without a story, there's no loan and no investors.
The story has to be defensible, too.
"We'll raise the rate 12% in year one" isn't a story. It's a wish. "We're acquiring a 100-room independent in a market with three new corporate anchors arriving in 2027, converting it to a strong flag with a $4 million renovation, and underwriting to a $20 average daily rate premium that comp set data already supports." That's a story a lender can underwrite and an investor can back.
The difference between the two is the difference between being financed and being passed over.
Building the right team
In a new build or major repositioning, the team determines the outcome. On the development side, the contractor, purchasing agent, engineer and architect need to be experienced specifically in hospitality and aligned with ownership objectives, not subcontracting it like a commodity. The wrong contractor on a $20 million renovation will quietly cost you more than a 50-basis-point rate spread ever could.
The operation side matters even earlier than most owners think. A strong operator should be brought in before the transition, not after, so they can shape sales strategy, revenue management systems and staffing plans before anyone hands them the keys. They need a sales and revenue management team in place before the doors open, leveraging today's robust market data to position rates from day one.
Every team needs a strong chief financial officer-type overseeing capital deployment. That critical person is there to ensure every dollar is spent wisely and monitored relentlessly. Hotels rarely fail because of bad concepts. They fail because of unmonitored spending and slow operational decisions.
Final thought
The bid-ask gap will close eventually. Sellers will reprice, or they won't transact. The owners standing on the other side of that adjustment will be the ones running the math today, not the ones still pitching 2021ās dynamics. Discipline doesn't make for exciting deal pitches. It makes for hotels that survive recessions, refinancings and the next cycle nobody saw coming.
Robert Rauch, CHA, has been an owner-operator of hotels for several decades and is founding chairman of Brick Hospitality, owner of R. A. Rauch & Associates, Inc.
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