Hotel Investment Sales See Cap Rate Compression Amid Strong Performance

By Majid Radaei, RadCRE · · Market Updates

Despite elevated interest rates, hotel investment sales continued to show resilience in late 2025 and Q1 2026, with average cap rates notably compressing for select-service assets.

Hotel Investment Sales See Cap Rate Compression Amid Strong Performance

The hotel investment sales landscape has demonstrated surprising resilience and a notable shift in investor sentiment through late 2025 and into the first quarter of 2026. Despite a persistently high interest rate environment, transactional activity, particularly in the select-service segment, has seen renewed vigor, leading to distinct cap rate compression in certain sub-sectors and markets.

Cap Rate Dynamics and Transactional Activity

According to recent reports by MSCI Real Assets (formerly RCA) and STR, overall hotel transaction volume in Q4 2025 approached $15 billion, a significant increase from the subdued levels observed earlier in 2025. This surge was partially driven by portfolio transactions and a renewed appetite for income-producing assets. While full-service offerings still command higher prices due to their asset-level complexities and operational expenses, select-service and extended-stay properties have emerged as preferred targets for institutional and private capital.

Data compiled by CBRE Hotels Research for Q4 2025 indicated that average cap rates for select-service hotels decreased by approximately 25-50 basis points from Q3 2025 highs, settling in the 7.5%-8.0% range for well-located assets in primary and strong secondary markets. This compression is largely attributed to robust RevPAR growth and stabilized operating expenses, which have offset higher borrowing costs for equity investors. In contrast, full-service hotel cap rates remained relatively stable, averaging 8.0%-8.75%, although prime luxury assets in gateway cities like New York and Miami continued to trade at tighter cap rates, sometimes below 7.0%, reflecting long-term intrinsic value and irreplaceable locations.

Notable transactions include:

Financing Landscape

Lenders, while still cautious, are exhibiting increased willingness to finance well-underwritten hotel properties. Bridge loans for value-add acquisitions currently float at SOFR + 300-600 basis points, with total effective rates often in the 8.5%-10.5% range. For stabilized assets, CMBS spreads have tightened slightly, now hovering around T + 150-250 bps for lower leverage, strong credit sponsors. This competitive financing environment, coupled with the improved operational performance of hotels, is contributing to the favorable cap rate sentiment.

RadCRE Perspective

Majid Radaei, Founder of RAD Commercial Realty, notes, "The market's narrative around hotel cap rates has been overly simplistic. While interest rates are elevated, smart capital isn't just looking at the absolute cap rate; it's valuing the underlying operational improvements and strategic segmentation. We're seeing aggressive bidding for select-service and extended-stay properties in resilient markets because their income stability and lower operational leverage make them incredibly attractive even today. It's not just about RevPAR growth, but also about the predictability of expenses and the ability to scale. Full-service hotels, on the other hand, require a much deeper dive into the specific uncrewed labor costs, management agreements, and capex schedules, which can significantly swing your effective yield. Our team is actively guiding clients to identify those value-add opportunities where operational efficiencies can drive outsized returns, rather than solely chasing cap rate compression in overbid markets."

The current market dynamics underscore the importance of detailed underwriting and strategic asset selection. As capital markets continue to evolve, understanding the nuances between different hotel segments and their varying risk-adjusted returns will be paramount for successful investment.

Tags: hotel investment sales, cap rate compression, select-service hotels, extended-stay hotels, commercial real estate financing, RadCRE, Majid Radaei

Sources: MSCI Real Assets, STR, CBRE Hotels Research, CoStar News, Commercial Observer