As 2025 draws to a close, hotel developers looking to finance projects in 2026 are facing higher costs and an exceptionally cautious lending environment.
Some have even decried that hotel construction lending is dead, but reports of its death are greatly exaggerated. Hotel construction is still being financed, just under a smarter and more selective playbook.
Hotel lenders, who are famously risk-averse, have further tightened their underwriting and diversified their capital sources. They’re looking for the surest bet possible before signing a deal. Currently, developers who are winning contracts are the ones bringing discipline and certainty to the table.
There is opportunity for developers positioning projects to open into the next upcycle, if they play their cards right. Here’s what developers should know before approaching lenders.
The new reality
The first thing that developers must keep in mind is that construction projects are taking longer and costing more across the board. CoStar data shows that the average hotel build time now exceeds 23 months, and costs have escalated across all chain scales. Predictably, lenders adjusted to the new reality and have evolved how deals are underwritten, priced and financed. The capital is still there; it just diversified and got smarter about risk.
When it comes to construction capital, banks have been joined by debt funds, private credit and even insurance companies. The capital stack has never been more flexible, but it does demand sophistication from loan-seekers. In fact, the strongest developers are treating capital structure as part of the development plan, not an afterthought. Here’s a brief overview of how different lenders can be leveraged.
Banks. Banks selectively lend to developers with whom they have an existing relationship. They are seeking lower-leverage deals — ≤65% loan-to-cost, with occasional outliers reaching 70% LTC on sub-$30 million deals — and fully entitled, GMP-ready projects.
Debt funds and private credit. These lenders are filling the gap left by banks and are often willing to take construction risk for higher spreads (SOFR + 500-800 bps) and stronger covenants. They’re also typically offering leverage a few points higher than banks — in some cases reaching up to 80% LTC through stretch-senior structures — especially for experienced sponsors or strong brands.
Insurance companies. Insurance companies are funding core-market builds with long-term yield profiles. They’re extremely selective.
Other structured capital layers. PACE, EB-5, mezzanine debt, and preferred equity are no longer considered “alternative” means of funding a project; they’re now a part of the overall mix.
Underwriting has also evolved. After all, lenders aren’t scared of construction; they’re scared of uncertainty. Uncertainty is what kills deals.
So what are lenders doing? They’re looking past models and digging deeper into market fundamentals like new supply, RevPAR trends and brand overlap to ensure that a project makes sense in today’s flat-growth environment. The market story must make sense for a deal to move forward. Loan sizing has also become more disciplined — proceeds are being set against total project feasibility, not just static cost metrics.
Developers must show that they can absorb things like cost creep and carry longer than expected without causing the deal to crumble. Many lenders also add limited recourse tied to the cost overruns or liquidity gaps, which are a step up from the standard completion guarantees written into most deals, to keep developers engaged through the full construction cycle.
Expertise is perhaps most critical. Execution certainty is critically valued, and the market is chasing a sure bet over volume. In short — credibility outweighs leverage. Committees are backing experienced developers who show clean budgets, verified bids, and a clear path to delivery. The easiest way for a developer to lose a lender is to overpromise or underdocument; lenders will fund risk if they can quantify it.
What’s getting financed
Certain types of hotel projects are more likely to get financed now than others. These projects have strong brand alignment and clear demand drivers in markets with good fundamentals — e.g., Sun Belt metros, medical/university hubs, and resort corridors. Select-service and extended-stay brands are particularly attractive because they’re reliable. Full-service and lifestyle properties are also appealing if they’re paired with JV equity or structured mezzanine/PACE layers.
Generally speaking, it’s the developers who understand leverage discipline and how to bring complete capital stacks to the table who will close deals. These savvy developers engage capital advisors early to design financeable stacks before locking in GMPs. They are also prepared for deeper due diligence from lenders, who are typically seeking cost verifications, timeline modeling and liquidity testing. Credibility and clarity matter more than maxing out leverage or project speed. Developers need to think like financiers before seeking funding.
Finally, and most importantly, relationships are still the ultimate driver of the hospitality industry. A strong rapport with lenders — and familiarity with a developer’s team and expertise — can decrease approval times and help close a deal.
Discipline today, premium tomorrow
Caution was the name of the game in 2025, but we still were able to lay meaningful groundwork for a stronger 2026. Hotel developers breaking ground now who use the disciplined assumptions and structured capital stacks mentioned above will deliver projects into a healthier demand and rate environment when those hotels open their doors in 2027 and 2028. Additionally, those new properties will come into the market with limited new supply competition and an aging competitive set, positioning them for a RevPAR premium.
The best operators are already planning for this eventuality and leaning into new hotel projects. They’re positioning themselves to win when the industry recovers, building through the trough to meet the rebound. Developers who build now aren’t being contrarian — they’re positioning ahead of the recovery.
Ryan Bosch is principal at Arriba Capital and a seasoned expert in hospitality debt and structured finance, managing a portfolio exceeding $2 billion across 140 deals.
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