Hotel Cap Rates Shift Amid Realigned Buyer Expectations and Debt Costs
By Majid Radaei, RadCRE · · Industry Insights
Hotel investment sales saw a significant shift in Q1 2026, with average cap rates publicly reported to expand to 7.8% as debt costs stabilize and transaction volume selectively picks up.
Hotel Investment Sales See Re-Pricing and Selective Activity in Early 2026
The first quarter of 2026 has witnessed a nuanced recalibration in the hotel investment sales market. After a period of price discovery and limited transaction volume throughout much of 2024 and 2025, buyers and sellers are increasingly finding equilibrium, though often at adjusted valuations. The stabilization, albeit at higher levels, of the interest rate environment has allowed for clearer underwriting and a gradual return of qualified buyers to the market.
Cap Rate Expansion Reflects Cost of Capital and Risk Premium
According to recent reports from firms like JLL and CBRE, average hotel cap rates have publicly expanded to approximately 7.8% at the close of Q1 2026, representing a notable increase from the 6.5-7.0% range observed in early 2023. This expansion is largely attributed to the sustained higher cost of capital, evidenced by current SOFR rates around 4.31% and bridge lending spreads of SOFR + 300-600 bps for acquisition financing. Buyers are demanding a higher risk premium for properties, particularly those requiring significant capital expenditure or facing labor cost pressures.
Transaction volumes, while still below peak 2021-2022 levels, are showing signs of life. A significant deal reported in March 2026 was Blackstone's sale of the 368-key St. Regis Bali Resort to a consortium led by a sovereign wealth fund for an undisclosed sum, rumored to be north of $200 million. While specific cap rates for such bespoke deals are rarely public, industry analysts suggest these high-value, irreplaceable assets are transacting at tighter cap rates due to their long-term stability and luxury branding. Conversely, select-service properties in secondary and tertiary markets are seeing more pronounced cap rate expansion.
Lenders Remain Selective; Debt Funds Continue to Fill Gaps
Traditional lenders, while more active than in 2024, remain selective in their hotel financing mandates. Regional banks are focused on existing client relationships, while CMBS markets for hotels are seeing spreads around T + 200-350 bps for stabilized assets, a slight improvement from last year but still reflecting cautious underwriting. Debt funds and alternative lenders continue to be critical players, often stepping in for value-add acquisitions or transitional assets where traditional financing remains challenging. Mezzanine debt is being priced in the 12-18% range, reflecting the higher leverage points and risk profiles.
STR Data Shows Performance Resilience
Despite the shifts in financing and cap rates, STR data continues to show resilience in hotel operating performance, particularly in drive-to leisure and certain urban markets experiencing a return to business travel. As of April 2026, U.S. RevPAR growth has remained positive year-over-year, albeit at a slower pace than the post-pandemic surge. This fundamental performance underpins investor interest, even with the higher cost of capital.
RadCRE Perspective
“The prevailing sentiment in the hotel investment market right now isn't one of distress, but rather one of rationalization,” notes Majid Radaei, Founder of RAD Commercial Realty. “We're seeing buyers who sat on the sidelines in 2024 now engaging, but with a much clearer understanding of their all-in cost of capital. For sellers, it's about meeting the market where it is today, not where it was two years ago. The sweet spot for deals right now are well-located, cash-flowing assets that can stomach the higher debt costs, or value-add opportunities with a clear path to increased cash flow. The financing is there, but lenders are demanding more equity and robust business plans. RadCRE is actively structuring tailored capital stacks that combine traditional senior debt with more flexible preferred equity or mezzanine solutions to bridge the gap between buyer and seller expectations, particularly for clients targeting quality hospitality assets.”
RadCRE continues to advise clients on navigating these complex market dynamics, providing comprehensive financial analysis and access to robust capital solutions for hotel acquisitions, dispositions, and financing strategies across various asset classes.
Tags: hotel investment sales, hotel cap rates, commercial real estate financing, CRE capital markets, distressed assets
Sources: JLL Hospitality, CBRE Hotels, STR, Commercial Observer