It’s a tough time for hotel developers. New projects are sidelined by elevated construction costs, scarce financing and painful entitlement timelines. Stabilized asset purchases aren’t faring much better as rising cap rates and expensive debt are breaking underwriting. These market conditions have turned the spotlight on conversions, which, ostensibly, require less construction, less financing and less work overall.
The appeal of conversions for hoteliers is obvious, but behind the headlines is a far more complicated story. There are many risks inherent in this area of the hospitality business, and they should be acknowledged and considered before embarking on a conversion project.
Let’s take a deeper look.
Why conversions are trending
There are several factors that led to conversions becoming a hot commodity in the hotel industry. From a financial standpoint, these properties are suited to low-basis plays, making it possible for investors to buy functionally obsolete or underperforming assets and use the conversion delta to juice yield. Conversions typically open in 12–18 months versus 30-plus months for ground-up builds.
The big brands also play a role. Ground-up development has been largely on pause, prompting franchisors to develop and strongly push conversion-friendly flags to boost key counts. Brands such as Spark by Hilton and Voco Hotels by IHG have attracted a lot of attention from developers and have rapidly expanding portfolios. Further, soft brands such as Marriott’s Tribute Portfolio, Wyndham’s Trademark Collection and Choice’s Ascend Collection further reward conversions with brand support. It’s no surprise that conversions accounted for more than 40% of brand pipeline growth in 2024.
Finding the right path
According to Lodging Econometrics, as of the first quarter in 2025, there were 1,421 conversion projects in the U.S. pipeline, up 13% year over year. But hoteliers should also keep in mind that not every flagged property is a conversion opportunity. Some should be refreshed with a property improvement plan, while others should simply be sold. At the risk of oversimplifying, there are some general guidelines that can help inform the decision-making process.
- PIP: PIPs work best for tired but brand-aligned properties. Cosmetic fixes typically offer a strong return on investment with less risk.
- Conversion: Hotels with a weak flag or that are part of a declining brand are primed for conversion. Up-flagging or joining a soft brand gives the hotel a new revenue per available room identity, which will help shake off any issues associated with the old brand.
- Sale: If there is limited demand for the brand or the hotel is in a deep tertiary market, it might be wisest to sell the property. Sometimes, economics don’t justify the repositioning spend.
There are situations where a property may fall into either the “sale” or “conversion” category. These hotels usually have obsolete layouts or low average daily rates. What the hotelier chooses to do should hinge on risk appetite, the market and their capital expenditure capacity.
Generally speaking, high-potential markets include urban cores, drive-to leisure and health system hubs, while risk zones encompass oversaturated tertiary markets. Brand uplift alone is not enough to overcome poor market conditions.
Capital considerations
Even though hotel conversions are hot right now, they are still subject to the state of the capital markets. Construction debt is expensive, constrained and often requires full recourse. Equity partners are also still incredibly risk averse and prefer lower basis and shorter timelines.
Hoteliers need to know their markets, know their projects and prepare for potential issues. For example, many conversion projects can be affected by cash flow gaps, as conversions often lack in-place income. This makes bridge debt the go-to capital source, but that also isn’t without risk. Bridge financing requires wider spreads (secured overnight financing rate of between 350 and 700 basis points), heavier reserve requirements, a more rigorous underwriting process and a stronger understanding of hotels than most regional bank lenders.
Lenders will also put projects under greater scrutiny. Expect questions like: Is the brand truly committed? Are projections realistic? Can the sponsor execute it?
Finally, don’t fall into the trap of relying on past experiences. It is critically important to ensure that you have the most up-to-date information before looking for capital. Look out for CapEx blind spots.
For example, do you have the most current numbers for your cost per key? Are your vendor estimates current or outdated? Also, are you 100% certain that your conversion proposal meets all brand standards? Underestimating on room size can kill a deal. Also, a brand rep telling you that “everything looks good” is not official brand committee approval. Be sure that you are crossing your t’s and dotting your i's.
Further advice
Hoteliers considering a conversion should keep a few more things in mind before going after capital. First, they should get brand buy-in as early as possible. This means getting written indication of brand support. This includes knowing the brand standards backward and forward. This includes the already-mentioned room size, FF&E, signage and layout. Don’t let ignorance impact your deal.
Hoteliers should also aim to build in more cushion than the standard 5–10% contingency. Heavier conversions often require a contingency north of 10%, especially with volatile construction costs, evolving brand standards and unforeseen infrastructure upgrades. Underestimating here is one of the fastest ways to derail a deal midstream.
Don’t assume a new flag alone will lift RevPAR by 20% — market fit and execution still drive outcomes. Upgrading a flag won’t solve underlying issues with a property or its underwriting. Be sure to approach this conversion with fresh eyes and an open mind.
The whole strategy
Conversions aren’t paint-and-patch jobs, they’re full-on repositions that require surgical underwriting, sponsor discipline and capital structure fluency. The conversions that succeed are those where execution isn’t an afterthought. It is the strategy. Capital, brand and ops all need to move in lockstep.
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.
The opinions expressed in this column do not necessarily reflect the opinions of CoStar News or CoStar Group and its affiliated companies. Bloggers published on this site are given the freedom to express views that may be controversial, but our goal is to provoke thought and constructive discussion within our reader community. Please feel free to contact an editor with any questions or concern.