Who wants to buy a hotel these days?
We still have transaction activity in the hotel sector of commercial real estate, but at reduced levels according to a May 2025 report from JLL, with 2024 transaction volume of $20.5 billion, versus a 10-year average of $29.5 billion.
Thus, it is only fair to recognize several of the factors that are still keeping some groups — public real estate investment trusts, in particular — on the transaction sidelines. The list includes overall economic uncertainty, slender RevPAR gains in our hospitality sector at present, and a range of deal-making impediments. These latter factors include the current cost of capital, the significant expense of ongoing property improvements in the modern era, and a continued disconnect between buyer and seller expectations.
Low cap rates and high interest rates do not make an enticing combination. Many lenders are still focused on refinancing loans or extending them.
Most importantly, each commercial real estate investor will have a distinct risk versus reward tolerance, IRR objective and, perhaps most importantly, investment time horizon. At what point does a hotel generate desired returns? When will lower interest rates return? Will this investment be a “yield play” or is there value-add opportunity for meaningful ADR growth and asset appreciation?
It is very tempting, but it is not good enough to compare hospitality with clearly challenged real estate sectors like commercial office properties or retail malls that face fundamental resets in user groups and consumer behaviors. Regardless, each real estate investment must stand on its own reasoning and metrics.
Astute investors will also remain attuned to the economic patterns and guest demand trends driving our industry. For example, depending on the market, we will need to acknowledge and understand the demand profile of other hotels in that market, as well as nontraditional competitors like Airbnb and Vrbo. Interestingly, hospitality dynamics seemed to be returning to pre-Covid levels until recently, with business and group demands returning. Moreover, while domestic leisure may have dropped off from pandemic years, it is expected to stabilize at 115% of 2019 levels, according to a June 2025 presentation from Lodging Analytics Research & Consulting.
Have an investment thesis you believe in
Regardless, in all cycles and markets, there are investors and operators who do well and outperform their markets. In our view, the key to success remains in finding properties that you believe in and for which you have a strong, property-specific business model and plan.
Even in today’s markets, there are positives that can inform acquisitions. The first is tepid new product in many markets, even with the introduction of many new brands. Certainly, some markets have had robust product introduction. Dallas is a good example in general, however we are not suffering from an overcapacity issue right now in our industry. Similarly, any dearth of new development will eventually be beneficial to current owners, operationally and for asset appreciation.
Second, whether is it cheaper to buy or build has been a longstanding consideration in our industry when acquiring and repositioning a hotel. However, that is less of a comparison today because of the vast disparity and unreliability between the excessive cost of new construction and, in many cases, the usually more reliable and notably lower cost of acquisition.
Third, some lenders are offering interest-only loans of a five-year basis to enhance cash flow, which is helping to get deals done.
Furthermore, there will always be those irreplaceable assets that transcend time and space. Add in a careful understanding of local markets and their existing and prospective demands drivers and barriers to entry, and there are ways to make the investment math work.
No one has a crystal ball that can tell us if, and when, hospitality dynamics will return to the more predictable and prosperous days pre-2019. However, the hospitality industry remains of indispensable service to our commercial world, individual travelers and, in a real sense, our aspirations for the future.
So, what’s the end game?
Investment return expectations may need to be adjusted — at least in the near term. Even though the underlying circumstances may differ by market and hotel tier, the investment metrics will be atypical as long as the cost of capital and seller value expectations remain high, brand required PIPs and hotel repositioning costs remain expensive and labor and other operating costs continue to accelerate disproportionately vs. RevPAR growth.
All this does make it more difficult for buyer and seller to reach agreement. But what are the alternatives? The interim solution may be in re-educating investors for lesser return expectations and longer hold periods, until at least the capital markets return to more normal pre-COVID levels.
As with many things, patience is a virtue.
Rick Takach is chairman and CEO of Vesta Hospitality.
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.