The hotel transaction market has endured one of the most dramatic interest rate increases in recent memory. Still, industry veterans now see signs of stabilization as buyers and sellers adjust their expectations. After the Federal Reserve raised the federal funds rate from 3.25% to 8.5% in just 14 months, starting in March 2022, pricing and deal activity have begun to settle into new, more sustainable patterns.
Brent Jaynes, Managing Partner at Leisure Real Estate Advisors, has spent nearly three decades specializing in hotel transactions across the central United States. His firm focuses on mid-market franchise properties, such as Hampton Inn and Holiday Inn Express, along major interstate corridors from Minneapolis to Dallas and from St. Louis to Denver.
Surviving the Rate Shock
The rapid rise in interest rates beginning in March 2022 posed immediate and severe challenges for hotel transactions. “It’s historic. Nobody’s ever seen that before,” Jaynes says of the 550 basis point jump over 14 months.
Despite widespread predictions that activity would collapse, the market remained surprisingly resilient. Jaynes and his team expected their deal volume to drop by half, but transactions continued at a solid pace. Many buyers adopted a “buy now, refinance later” approach, assuming lower rates were imminent. However, that hoped-for drop in rates has not materialized as quickly as many anticipated. “Rates have been sticky,” Jaynes notes.
Even as rates have fallen by 175 basis points over the past 10 months, they remain well above pre-2022 levels. Jaynes is skeptical that the market will return to sub-4% rates anytime soon.
Market Recalibration
The prolonged period of higher borrowing costs has forced a reset in the hotel market. Sellers who initially resisted lowering prices have had to adapt to buyers’ expectations. “During the past 12 months, the buying public was saying, ‘Mr. Seller, we’re not going to pay that,’” Jaynes recalls.
When listings generated little activity, sellers faced a straightforward choice: adjust the price, or risk the property sitting unsold. In most cases, price was the sticking point. Once sellers became realistic about pricing, deals started moving again.
This marks a clear shift from the seller’s market that defined the immediate post-pandemic era. The market is now more balanced, with buyers holding greater leverage. The fundamentals are straightforward: when debt service costs rise, equity returns shrink, forcing buyers either to pay less or put more cash into each deal.
Operational Pressures Mount
Financing is not the only challenge hotel owners face. Operating costs, including insurance, wages, fuel, and basic supplies, have climbed sharply. “Hoteliers have been squeezed pretty tightly here on all fronts as far as the costs go,” Jaynes says.
Food costs, such as eggs for hotel breakfasts, have doubled in some cases. At the same time, operators have struggled to raise room rates fast enough to keep pace with these expenses, resulting in thinner profit margins across the industry.
For owners who financed properties at 4% and now face refinancing at rates above 7%, the combination of higher interest and operating costs leaves significantly less cash flow after debt service. This margin compression complicates both day-to-day operations and the economics of closing new deals.
Transaction Dynamics
Hotel brokerage differs from most commercial real estate sectors. While residential agents often work with buyers focused on specific locations, hotel buyers are generally opportunistic and will consider properties anywhere that make financial sense. “Hoteliers will go anywhere they can make money,” Jaynes says.
This nationwide reach makes buyer representation difficult, as few agents have deep expertise across such a broad geographic range. Instead, the business is built around seller representation, with brokers marketing properties that combine real estate and operating businesses.
Hotel transactions are more complex than standard real estate deals. In addition to sales contracts, buyers must navigate franchise agreements, employee matters, and a host of service contracts for maintenance, landscaping, and waste removal. These layers require specialized knowledge and careful coordination to close deals smoothly.
Common Deal Killers
Two main obstacles derail hotel transactions. The first is the scope of franchise-required property improvements. Every franchise issues a document, commonly called a Property Improvement Plan (PIP), that outlines the upgrades required to maintain brand standards. “An 80-room, eight-year-old Holiday Inn could cost anywhere from a million to $2 million for improvements,” Jaynes says.
If the PIP costs are not known, sellers and buyers can be blindsided by unexpected costs, causing deals to fall apart late in the process.
The second key challenge is financing. While lenders are still active for properties with strong cash flow, underwriting standards are tighter and loan terms are less generous than in previous years. “If you’ve got cash flow, you will get interest, and that’s true today as it has been since I started,” Jaynes says. Properties without healthy revenues, however, struggle to attract financing and often face steep price discounts.
Bright Spots and Future Outlook
Despite these hurdles, there are reasons for optimism. Travel demand has remained strong since the pandemic, with leisure and business travelers alike showing a sustained appetite for hotel stays. “People have decided they’re going to continue to travel,” Jaynes observes.
Falling fuel prices are another positive sign, reducing travel costs for guests and supporting both leisure and business segments. Lower jet fuel and gasoline prices help maintain healthy occupancy rates, especially in drive-to and regional markets.
Business travel, a critical driver for many hotels, remains resilient. Jaynes points out that many jobs, such as construction, maintenance, and service work, require in-person travel and cannot be replaced by technology. “Those types of businesses will always be out there, and they’ll be staying at hotels,” he says.
Investment Appeal Endures
Hotels continue to attract investors seeking alternatives to traditional stocks and bonds. The sector offers several advantages: higher potential returns, direct control of an operating business, and meaningful tax benefits through depreciation and interest deductions.
“You can make a nice living with a franchise that doesn’t own real estate, but the real estate interest and depreciation on the asset filters that income,” Jaynes explains. Owners can often show a paper loss for tax purposes while still generating positive cash flow, a unique benefit of hotel investments.
Market Fundamentals
Looking ahead, Jaynes believes that cash flow remains the single most important factor in hotel transactions. “If you have cash flow, buyers will be interested, and lenders will be interested,” he says.
Properties with strong, stable cash flow continue to trade efficiently, while distressed hotels, those with weak revenues or high costs, face significant price reductions. “If you’re distressed, you’re going to get hammered on price, period. Compromised cash flow is no way to maximize value in this environment.”
The rise in interest rates has reduced the margin for error across the market. “Having a rate go from three and a half to eight eliminates a lot of risk-taking. The cushion for mistakes is gone,” Jaynes says.
Where the Market Goes Next
The hotel transaction market is adjusting to a new reality: higher borrowing costs, tighter margins, and more disciplined pricing. Sellers who recognize this environment and price accordingly are closing deals, while those who cling to outdated valuations risk being left behind.
For investors, hotels remain a compelling option, offering not just the potential for strong returns, but also the benefits of real estate ownership and tax efficiency. As the market finds its footing after the rate-shock era, fundamentals such as cash flow, operational discipline, and realistic pricing will determine which properties succeed.
Jaynes’s advice for industry participants is straightforward: specialize in your niche, master the details of people, process, and product, and remember that while conditions change, the basics of real estate never do. In today’s environment, success comes down to preparation, expertise, and a clear-eyed view of what drives value.
