Hotel financing is being reshaped by higher development costs, shifting valuations and tighter credit standards that are pushing both lenders and borrowers toward more selective, disciplined dealmaking.But alternative lenders have come to the forefront, offering borrowers several other options for their financing needs. To get a clearer picture of how these dynamics are influencing capital decisions across the industry, Hotel Business caught up with Francisco Nacorda, SVP, Mag Mile Capital; Jeffrey Pacailler, director, Cronheim Hotel Capital; and Michael Sonnabend, CEO/cofounder, PMZ Realty Capital LLC.
—Gregg Wallis
What financing challenges are hotels currently facing amid rising development and renovation costs?
Nacorda: Financing hotel development and major renovations has become increasingly complex. Construction risk, long timelines and limited in-place cash flow have always posed challenges, but today’s market pressures are intensifying them. Inflation, tariffs, rising property insurance and higher labor and materials costs are driving project budgets higher, while rising interest rates and expanding cap rates are putting downward pressure on valuations. These dynamics are making new construction and large-scale renovations harder to justify, even for experienced sponsors.
According to recent American Hotel & Lodging Association (AHLA) survey data, macroeconomic uncertainty and tighter lending standards are prompting many hotel owners to delay or scale back development and renovation plans. Traditional lenders—particularly banks and credit unions—are becoming highly selective, focusing on borrowers with strong balance sheets, substantial deposit relationships and alignment with top-tier brand flags such as Marriott and Hilton.
As conventional financing pulls back, private lenders and debt funds are stepping in. These alternatives can provide critical flexibility but often come at higher interest rates, elevated fees and more conservative leverage, requiring sponsors to contribute greater equity.
Operating fundamentals are softening alongside financing pressures. Year-over-year declines in occupancy and RevPAR are reported across multiple markets, and STR notes that U.S. hotel occupancy has fallen for seven consecutive weeks. Together, these trends are shaping a cautious, disciplined environment for both lenders and investors.
Pacailler: Capital is still widely available for strong deals. While rising development and renovation costs have certainly created challenges in the industry, I don’t think they have created financing challenges. Lenders are sizing based off performance and values and have remained fairly consistent, if not a little more aggressive, in their underwriting. Where we’ve seen rising costs impact deals is on the sales side, not the financing side. Buyers are just willing to pay less.
Sonnabend: The biggest challenge that hoteliers face today is rising costs in all aspects of development. The increases in construction costs are at substantially higher levels than they were several years ago, making it difficult to “pencil out” new deals. This applies to both new construction and acquisitions where significant upgrades or PIPs are part of the business plan. While moderating short-term interest rates has given some relief to borrowers, it is not a panacea.
How have shifts in interest rates and lending standards affected hotel investment strategies?
Nacorda: Lenders are placing heightened emphasis on in-place cash flow, sponsorship strength and proven operational experience. With interest rates elevated and credit standards tightening, cap rates continue to rise, placing downward pressure on hotel valuations across segments. Investors are adjusting accordingly—moving toward more conservative underwriting, stress-testing IRRs and prioritizing downside protection. These dynamics are creating a more selective and disciplined lending environment, often requiring sponsors to contribute additional equity to advance projects.
Amid this shift, investors are reevaluating which asset types and strategies best align with today’s risk–return profile. More borrowers are opting for 3- to 5-year fixed and floating rates as the costs of capital continues to compress.
Select-service and extended-stay properties remain highly attractive due to their operational efficiency, resilient demand patterns and manageable deal sizes. Value-add and conversion opportunities are also gaining momentum, offering lower cost bases, faster delivery timelines and quicker pathways to stabilized cash flow compared with ground-up development.
Pacailler: We’ve seen investors focus on deals with stronger in-place performance to mitigate high interest reserves and construction/tariff risks. It’s a lot easier to underwrite a hotel’s current performance than to have a high level of confidence in projections three years from now. We’ve also seen a flight to quality, in terms of well-built, well-flagged and well-located assets. Investors are generally averse to full-service boxes and prefer limited-service properties with efficient operations.
Sonnabend: Interest rates are significantly higher than they were five years ago, and lending standards are tighter than they were 10 years ago. This combination of factors has made it more difficult to find attractive investment opportunities at pricing that is acceptable to sellers. However, more sellers have strategic reasons to sell at today’s valuations, which has moderated the bid-ask spread. Well-capitalized borrowers with an exceptional track record of raising capital are in a much stronger position to achieve their investment goals.
Are alternative financing models—like EB-5, crowdfunding, or private equity—playing a larger role in your deals?
Nacorda: EB-5, crowdfunding platforms and private equity are beginning to play a larger role in specific segments of hotel financing—particularly in development-heavy projects. While these sources represent a relatively small share of overall CRE and hospitality capital, they can be valuable tools when traditional debt is limited. Each structure, however, is complex and requires multiple stakeholders and processes to align to successfully execute.
In today’s tighter credit environment, we are also seeing an uptick in sponsors seeking private equity for limited parter (LP) or general parter (GP) positions, as well as joint-venture capital to move projects forward.
Pacailler: We have not seen these specific structures on many of the deals we have worked on in the last few years. However, one of the alternative financing models we have seen growing in popularity is C-PACE. In states that have an active program, this can be an accretive way to reduce the cost of capital for renovation or development projects. There are certainly trade-offs to consider, and many senior lenders do not allow it, but we’ve structured a number of deals where it is part of the capital stack.
Sonnabend: The key to being successful in finding deals in 2026 will be the access to capital at reasonable cost. At PMZ, we have successfully provided funds from various types of financing sources to our clients. A key source in the coming year will be smaller private-equity funds and other private investors. Other alternative avenues are also available and should be considered by investors.
What types of projects or markets are most attractive to lenders and investors right now?
Nacorda: Select-service and extended-stay hotels are the most favored categories across the capital stack. Lenders like them because they have lower development costs, stronger operating margins, less labor exposure and faster stabilization. Investors value their consistent cash flow and resilient demand drivers. Value-add, renovation and conversion projects outpace new construction where costs remain elevated, lenders and investors prefer projects with a quick path to stabilized cash flow.
Strong, growing secondary and Sun Belt markets offer diversified demand generators, population growth and healthy year-round business. States include Texas, Florida, the Carolinas, Tennessee, Georgia and Arizona, as well as stable suburban Midwest markets near medical centers, universities, downtown areas and airports.
Pacailler: The most attractive deals are well-flagged (such as Hilton, Marriott or Hyatt) with experienced operators backed by strong balance sheets. They may require a light renovation or repositioning but the value-add is well supported by the market/comps. They have performed well historically and have cash flow in place. The market has multiple strong demand generators (for example, large corporate presence, university, medical facilities, leisure draws, etc.) and high barriers to entry for new development.
Sonnabend: Lenders and investors are focused on projects that provide some type of experiential component. It may be provided by location, property amenities or a combination of both. It’s much more difficult to raise capital for traditional properties without multiple and specific demand generators.
How do you see the hotel financing landscape evolving over the next few years?
Nacorda: The hotel financing landscape is expected to see year-over-year growth in transaction volume over the next several years, driven by a combination of market recovery and strategic recapitalization opportunities. Higher interest rates and elevated cap rates will continue to influence investor behavior, creating openings to acquire hotels at reduced cost basis or fund ground-up development at more disciplined pricing.
CMBS hotel financing is expected to remain a robust source of capital, particularly for stabilized assets in prime markets. As operating revenues recover and borrowing costs moderate, hoteliers are likely to pursue refinancing strategies to unlock equity, improve liquidity and secure long-term fixed rates, providing greater financial flexibility.
Alternative capital sources—including private debt, mezzanine financing and joint-venture equity—will continue to complement traditional lending, helping sponsors bridge the gap where conventional financing is tight or expensive.
Overall, the combination of improving market fundamentals, strategic recapitalization and diversified capital options is expected to fuel continued deal activity, particularly in value-add, conversion and select-service segments, positioning well-capitalized investors to take advantage of both.
Pacailler: Banks will have limited capital and remain very selective in the deals/sponsors they choose to finance. The space will continue to see new debt funds enter and competition for quality deals will be very strong, driving down spreads.
Capital will remain widely available. CMBS financing will continue to be very relevant in the space due to its attractive combination of leverage, rate, interest only and nonrecourse terms.
Sonnabend: Access to capital will be a primary challenge over the next few years. The combination of the tremendous amount of maturing debt and an uncertain economic environment will continue to cause an imbalance in the supply and demand for capital. Successful borrowers will be those who have experience, a strong track record and a well-thought-out business plan.
