Hotels, interest rates and the cost of capital: hospitality investment enters a more selective cycle

In the hotel market, occupancy, ADR and RevPAR are not the only variables that move.

Interest rates move. Debt costs move. Investor return expectations move. Energy prices move. The US dollar moves. Banks’ appetite for financing new transactions also changes.

These forces may seem distant from the daily operation of a hotel, but they directly affect the economics of acquisitions, disposals, refinancing, renovations and development projects.

The recent market focus on a Federal Reserve stance that appears more restrictive than expected reinforces a central point: capital is no longer as abundant, or as inexpensive, as it was in previous cycles.

For hospitality investment, the implication is clear.

The market is entering a more selective phase.

The end of easy hospitality investment

During the years of ultra-low interest rates, many real estate transactions were supported by cheap debt. Growth was rewarded, leverage was easier to access, and business plans could more easily absorb optimistic assumptions on revenue, capital expenditure and stabilisation timelines.

That environment has changed.

A hotel can no longer be valued simply on the appeal of the building, the strength of its location or the theoretical potential of the destination. It must prove that it can generate sustainable cash flow, remunerate invested capital, absorb operating costs and withstand a higher cost of debt.

This applies to operating hotels. It applies even more to assets requiring repositioning, properties to be converted into hotels, family-owned hotels facing generational transition, hotels in need of major refurbishment and transactions built around significant capex programmes.

In the current market, it is no longer enough to say that a hotel has potential.

The potential has to be proven.

Why interest rates directly affect hotel values

A hotel is a distinctive asset. It is a property, an operating business and a service platform at the same time.

This hybrid nature makes it more complex to value than many other real estate asset classes. A hotel does not create value simply because it occupies a good location. It creates value when it is properly managed, captures the right demand, has a clear positioning, controls costs, invests in the product and converts revenue into operating profit.

When interest rates rise, or when the market believes they will remain higher for longer, several fundamentals change:

• the cost of debt increases;

• sustainable leverage declines;

• investors require higher returns;

• tolerance for fragile business plans decreases;

• cash-flow quality comes under greater scrutiny;

• the gap often widens between the price sellers expect and the price buyers can justify.

For this reason, a change in interest rates can affect hotel valuations even when the hotel continues to perform well operationally.

Buying a hotel with debt at 2% is one thing. Buying the same hotel with debt at 5%, 6% or more is a very different proposition, especially if the asset requires investment, margins are unstable or the business plan depends on a long repositioning period.

The new role of cap rates in hospitality real estate

In hospitality real estate, the cap rate is never just a number. It reflects a combination of factors: operating risk, asset quality, destination strength, operator profile, contract duration and structure, growth prospects, liquidity and the alternative cost of capital.

When bond yields rise, hotel investors reassess their return expectations.

This does not mean that all values automatically fall. The best hotels, in strong locations and with proven performance, continue to attract capital. But it does mean the market becomes much more demanding toward anything that carries uncertainty.

Trophy assets remain more resilient.

Hotels with international demand, distinctive positioning and robust margins remain highly sought after.

Properties with weak contracts, outdated products, uncertain management or compressed profitability become harder to finance and harder to value.

The real divide is no longer simply between primary cities and secondary markets.

It is between assets with a credible investment case and assets supported mainly by a persuasive narrative.

Italian hospitality: strong interest, greater discipline

Italy remains one of Europe’s most attractive hotel investment markets.

Cities of art, leisure destinations, luxury resorts, historic villages, thermal locations, seaside resorts, mountain destinations and experiential tourism continue to attract domestic and international investors. Tourism demand is strong, the Italy brand is powerful and many assets still offer room for value creation.

But an attractive market does not make every transaction sustainable.

The Italian hotel market has specific characteristics: many hotels are still family-owned, numerous properties require significant investment, management quality is uneven, contracts are not always efficiently structured and many valuations remain influenced more by emotional expectations than by industrial logic.

In a higher-cost capital environment, these factors become decisive.

A sophisticated investor does not simply buy a location. They buy expected cash flow, operating risk, capex requirements, contractual structure and a potential exit route.

The right question is no longer: “What is this hotel worth in theory?”

The right question is: “How much value can this hotel realistically generate, with this debt, these costs, this capex requirement and this market?”

A stronger dollar can help, but it is not enough

A stronger US dollar can support European and Italian hospitality.

It can stimulate US demand for Europe, increase the purchasing power of some international investors and make euro-denominated hotel assets more attractive to dollar-based capital.

For cities such as Rome, Florence, Venice and Milan, as well as many high-end leisure destinations, the US market remains a key source of both demand and investment.

But this factor also needs to be read carefully.

A stronger dollar can improve Europe’s perceived competitiveness. It cannot fix an excessive purchase price, an unbalanced contract, a weak business plan or an overly aggressive capital structure.

Currency can improve the context.

It cannot compensate for a poor transaction.

Energy and oil: hotel profit and loss accounts remain exposed

Oil prices and, more broadly, energy costs remain central variables for the hotel industry.

Hotels consume energy continuously: heating and cooling, hot water, kitchens, laundry, lighting, lifts, spas, pools, technical systems and common areas all have a material impact on operating costs.

Lower pressure on energy prices can improve margins, particularly in highly serviced properties. It can also support travel mobility, reduce budgeting uncertainty and make business plans easier to assess.

But energy is only one part of the equation.

Payroll, maintenance, distribution commissions, insurance, rent, local taxes and capex continue to weigh on hotel profitability.

A well-managed hotel benefits from a favourable energy environment.

A structurally weak hotel remains weak even when energy costs ease.

The real test: the business plan must survive stress testing

In this phase, every hospitality transaction should be subjected to rigorous stress testing.

It is not enough to build an attractive base case. Investors need to understand what happens if:

• debt costs more than expected;

• the ramp-up takes longer;

• ADR grows less than forecast;

• occupancy does not reach the expected level;

• energy costs rise again;

• capex increases;

• the operator underperforms;

• the market becomes less liquid at exit.

A strong hospitality transaction is not one that works only in the best-case scenario.

It is one that remains sustainable when some assumptions prove weaker than expected.

That is the real difference between real estate speculation and industrial hospitality investment.

The bid-ask gap in hotel transactions

One of the clearest effects of the new environment is the gap between sellers and buyers.

Many owners still think in terms of values formed during previous cycles, when debt was cheaper and liquidity more abundant. Buyers, by contrast, update their models based on today’s cost of capital, higher return expectations and more selective lenders.

This is where the bid-ask gap emerges: the seller asks one price, while the buyer can justify another.

In the hotel sector, this gap is particularly sensitive because value does not depend only on square metres or location. It depends on the hotel’s ability to generate income and on the credibility of the development plan.

Excellent assets will continue to transact.

Average assets will need more realistic valuations.

Problematic assets will require patient capital, management expertise and very solid industrial plans.

Refinancing: the hidden risk for many hotels

This issue does not only concern buyers.

It also concerns existing hotel owners.

Many properties may, in the coming years, face debt maturities, loan renegotiations, unfinished investment programmes or refurbishment works that can no longer be postponed. If the cost of capital remains high, refinancing can become more expensive and reduce the liquidity available for product improvement, staffing, marketing and maintenance.

The risk is clear: a hotel may generate solid revenues but still have a financial structure that no longer fits the market environment.

In these situations, the answer is not purely financial.

It is industrial.

Positioning, margins, contracts, capex planning, governance and operating strategy all need to be reassessed.

Finance alone does not save a hotel. But a poor financial structure can compromise even a good one.

Valuing a hotel today requires broader expertise

Hotel valuation can no longer rely on simplified approaches.

It requires integrated expertise across real estate, finance, operations, contracts and management.

A serious analysis should consider at least:

• historical and normalised profit and loss;

• real and sustainable EBITDA;

• revenue growth potential;

• quality of demand;

• competitive positioning;

• condition of the property;

• required capex;

• debt structure;

• lease, rental or management contracts;

• quality of the operator;

• interest-rate environment;

• expected return on capital;

• exit risk;

• liquidity of the relevant market.

To explore cases, trends and transactions related to hospitality real estate, readers can consult the Investimenti Alberghieri blog, which analyses market dynamics, acquisitions, hotel assets and investment scenarios.

For further insight into hospitality, development and investment logic, the InvestHotel blog is also a useful resource, connecting capital, management and hotel product strategy.

For a broader perspective on contracts, operations, revenue, organisation and the hotel business, the hotel guides by Roberto Necci provide practical insight into how the financial dimension of investment connects with the reality of hotel management.

The market will reward hotels with a clear investment thesis

In the new cycle, the most beautiful hotels will not necessarily win.

Hotels with a clear investment thesis will.

An asset may be attractive because it has an exceptional location. Or because it is undermanaged. Or because it can be repositioned. Or because its contract can be improved. Or because it is located in a growing destination. Or because it can attract an international brand. Or because it offers scope for real estate development.

But that thesis must be demonstrable.

The market will no longer reward generic narratives such as “property with great potential” or “hotel to be enhanced”. It will reward transactions in which potential is translated into numbers, timelines, capex, risks, responsibilities and expected returns.

The distinction will become increasingly clear:

• hotels with transparent numbers;

• hotels with professional management;

• hotels with a coherent product;

• hotels with solid contracts;

• hotels with realistic business plans;

• hotels with adequate capital.

Everything else will become harder to finance, sell or reposition.

What owners and investors should do now

In this phase, owners, investors and operators should avoid two opposite mistakes.

The first is assuming that the hotel market is immune to the financial environment simply because tourism demand is strong.

The second is assuming that a higher cost of capital blocks all opportunities.

The reality is more interesting.

The market is not stopping. It is changing its selection criteria.

For this reason, it is now essential to:

• update valuations;

• revise business plans;

• test debt sustainability;

• stress-test operating margins;

• analyse capex with greater discipline;

• distinguish between real estate value and business value;

• build a coherent operating strategy;

• negotiate more balanced contracts;

• prepare the asset for potential sale, partnership or refinancing processes.

Those who approach this work methodically will be able to capture important opportunities.

Those who remain anchored to values from the previous cycle risk failing to understand why the market no longer recognises certain valuations.

Conclusion: capital selects, the hospitality industry responds

Monetary policy does not determine the success of a hotel on its own.

It does not decide occupancy, build a brand, train staff, improve service or create a commercial strategy.

But it does affect the cost of capital, valuations, cap rates, leverage, refinancing and the sustainability of transactions.

For this reason, anyone investing in hotels cannot look only at tourism data. They also need to read financial markets.

The new cycle does not eliminate opportunities. It makes them more selective.

And that selectivity can become an advantage for those who know how to analyse hotels through a genuinely industrial lens, integrating real estate, operations, capital, contracts and strategy.

In the hospitality investment market of the coming years, buying well will not be enough.

The real advantage will belong to those who understand the asset better, model the risk more rigorously and build a strategy that can withstand a more selective capital environment.

Today, assessing a hospitality transaction means going beyond the price of the property and beyond historical revenues.

It means understanding whether the asset can withstand the new cost of capital, whether the business plan is realistic, whether the operating model is adequate, whether the contracts protect value and whether the project can generate returns even in a more selective environment.

Hotel Management Group supports owners, investors, family offices, operators and developers in hotel valuation, advisory, development, governance and repositioning projects.

Its approach combines real estate analysis, operational insight, economic and financial sustainability, strategic planning and an industrial view of the asset.

To assess a hotel, structure an acquisition or disposal, review a business plan or build a development strategy aligned with the new capital environment, visit Hotel Management Group and request a professional consultation.

Roberto Necci - r.necci@robertonecci.it