Hotel Investment Sales See Cap Rate Compression Amidst Strong Demand & Financing Shifts
By Majid Radaei, RadCRE · · Industry Insights
Q4 2025 data shows hotel cap rates have compressed, with select-service assets achieving sub-7% rates in key markets, driven by robust RevPAR growth and nuanced financing solutions.
Hotel Investment Sales See Cap Rate Compression Amidst Strong Demand & Financing Shifts
The U.S. hotel investment market concluded 2025 with resilient activity, demonstrating a notable compression in cap rates for certain asset classes, despite persistent macroeconomic uncertainties. While transaction volume in Q4 2025, as reported by MSCI Real Capital Analytics (RCA), cooled slightly compared to the peak of 2021-2022, investor appetite for well-positioned hospitality assets remains robust, particularly within the select-service and extended-stay segments.
Key Trends & Data Points Driving Compression
Several factors are contributing to this cap rate compression. Firstly, stronger-than-expected RevPAR (Revenue Per Available Room) growth across many markets continues to underpin investor confidence. STR data indicates national RevPAR growth of approximately 5.8% for the full year 2025, exceeding initial forecasts. This performance has validated proformas for buyers and encouraged sellers, particularly in sunbelt markets such as Florida and Texas.
Secondly, the availability and structure of financing have adapted. While conventional bank lending remains selective, alternative lenders, including debt funds and private credit, have stepped in to bridge the gap. Bridge loans, often priced at SOFR + 300-600 basis points, are facilitating value-add acquisitions, while certain life insurance companies are offering more competitive terms for stabilized, performing assets. This nuanced capital landscape is allowing more deals to close.
Recent transactions underscore these trends:
- Nashville Market: A portfolio of three select-service hotels in the Nashville MSA, totaling 350 keys, traded in December 2025 for an estimated $75 million. Market sources close to the deal suggest an implied cap rate in the high 6% range, reflecting strong investor belief in the market's continued demand drivers.
- Extended-Stay Resilience: Blackstone recently announced the acquisition of a roughly $120 million portfolio of extended-stay properties across six states in January 2026. This move highlights the perceived stability and operational efficiency of this segment, often trading at tighter cap rates due to its defensive characteristics during economic fluctuations. For high-quality, stabilized extended-stay assets, cap rates are reported to have tightened to sub-6.5% in some primary markets.
- Resort & Luxury Market Nuance: While luxury and resort assets faced higher interest rate pressure, deals such as the recent sale of the Ritz-Carlton, Laguna Niguel, by Strategic Hotels & Resorts (an affiliate of Anbang Insurance Group) to an undisclosed institutional buyer for over $300 million in late 2025, illustrate that trophy assets with irreplaceable locations can still command significant pricing and competitive cap rates, often in the 5% to 6% range, especially when accompanied by strong operational performance and clear value-add rebranding opportunities.
RadCRE Perspective
Majid Radaei, Founder of RAD Commercial Realty, notes, "We're past the peak interest rate shock, and the market is recalibrating. While 2023 and early 2024 saw significant divergence between bid and ask, that gap has narrowed considerably. We're seeing real cap rate compression in the select-service and extended-stay sectors, primarily because operational fundamentals are strong, and debt is becoming more accessible, albeit at higher costs than pre-2022. Smart capital isn't waiting for 5% interest rates again; they're underwriting today's SOFR + 350-400 bps debt and finding value. Deals are getting done. However, investors need to be incredibly diligent in their underwriting – true institutional-grade analysis is crucial to separate the performing assets from those where RevPAR growth has peaked. We're advising clients to focus on markets with clear population growth, diverse demand generators, and manageable labor costs, and to leverage creative financing solutions, including non-recourse bridge debt and preferred equity, to optimize capital stacks."
The nuanced financing environment requires sophisticated structuring. RadCRE's experience in hotel investment sales and CRE financing demonstrates that understanding the current lending landscape—from CMBS spreads at T + 150-300 bps for stable portfolios, to private debt funds offering mezzanine financing at 12-18%—is critical for buyers to execute deals competitively. The market is rewarding those who can identify resilient assets and construct efficient capital stacks.
Tags: hotel investment sales, cap rate compression, commercial real estate financing, select-service hotels, extended-stay, RevPAR growth, RadCRE, Majid Radaei
Sources: MSCI Real Capital Analytics (RCA), STR, CoStar, Commercial Observer, Bloomberg, HVS