Securing financing for hotel development continues to remain challenging. Traditional lenders continue to scale back, and those still active are offering significantly lower loan-to-value (LTV) ratios, making it difficult for developers to move projects forward. Higher interest rates further complicate the landscape, forcing developers to pursue creative capital solutions.
Many are turning to alternative financing options to fill this void, with private credit lenders playing an increasingly prominent role.
Rising hotel construction costs have only heightened the demand for higher-leverage financing. By combining bridge loans with Commercial Property Assessed Clean Energy (CPACE) financing, developers can unlock greater capital efficiency, maximizing leverage while avoiding prohibitively expensive equity. This strategic pairing is gaining traction as a powerful solution in today’s tight credit environment.
CPACE financing, once seen as a niche solution for sustainability-related upgrades, has become a competitive and essential tool in the hotel capital stack. With pricing similar to bridge loans but offering longer fixed-rate terms, CPACE financing helps maximize leverage while keeping capital costs manageable. However, structuring these deals requires a lender with expertise in bridge and CPACE financing, as CPACE takes a senior position over bridge debt, something many traditional lenders refuse to consider.
Despite financing headwinds, the fundamentals for hotel investment remain strong. Unlike other real estate asset classes, hotels offer pricing power, allowing owners to adjust rates based on demand, a crucial advantage in today’s inflationary environment.
Additionally, a severe lack of new hotel supply, caused by rising costs and tighter lending standards, is creating a favorable supply-demand imbalance. As travel demand remains strong, well-positioned hotels are achieving higher occupancy, stronger average daily rates, and superior investor returns.
Another key driver of newer hotels outperforming is the ongoing renovation bottleneck. Many existing assets, starved of reinvestment due to COVID-era cash flow disruptions, are struggling to remain competitive. With renovation activity severely constrained, newly developed or repositioned hotels are in prime position to capture market share and command premium pricing.
Certain hotel segments are proving more attractive to owners and developers amid these financing headwinds. The bulk of financing today flows toward hotels in the extended-stay and dual-branded categories.
Extended-stay properties continue to perform well, benefiting from longer average stays, lower operational costs, and strong demand from business and leisure travelers. Meanwhile, dual-branded hotels are becoming increasingly popular due to their ability to create operational efficiencies, reduce overhead, and make projects more financially viable.
As bank lending remains constrained, private credit lenders are becoming the backbone of hotel financing, offering the reliability, flexibility, and certainty of execution that developers need. Those who embrace alternative capital structures and align with experienced lenders who understand the complexities of today’s capital stack will be best positioned to capitalize on evolving opportunities in hospitality investment.
While uncertainty persists, one thing is clear: the demand for creative financing solutions has never been greater. Those who understand this will unlock new growth, maximize returns, and lead the next wave of hotel development.
Sponsored by Peachtree Group.
