Hotel financing markets are showing more predictability heading into 2025, as capital sources diversify and lenders gain confidence in stabilized interest rate expectations.
While borrowing costs remain elevated, the availability of capital has expanded, creating opportunities for well-positioned borrowers. After years of market volatility and tight lending requirements, what is behind this shift toward available capital?
There are several factors at play, but one particularly worth noting is the influx of new non-bank lenders in the hospitality space. These lenders stepped in to fill in the void when traditional banks muted their hospitality lending in the last 24 months. While banks are gradually reentering hospitality lending, they remain selective, favoring well-capitalized sponsors and lower-risk markets. Alternative lenders — debt funds, private credit, and insurance-backed capital — continue to play a dominant role in hotel financing, particularly for construction and value-add projects. While the cost of that capital is higher, the variety in hotel capital markets will likely drive growth and compress interest rate spreads in the new year.
Now, let's explore how you can make this diversity in hospitality lending work for you.
The evolution of hotel capital markets
Traditional banks pulled back from hospitality lending primarily due to perceived sector volatility, heightened regulatory scrutiny and balance sheet constraint, not just liquidity concerns. This retrenchment was particularly evident following the regional banking crisis in early 2023, when rising deposit flight and asset-liability mismatches led some banks to tighten credit across commercial real estate. Over the past year, regional banks have remained selective, making it especially difficult to secure traditional financing for hospitality deals. As a result, borrowers increasingly turned to alternative capital sources, including private lenders, debt funds, life insurance companies and specialty finance firms to bridge the gap.
Overall, this helped meet demand. We’ve seen an enormous amount of flexibility in how these deals are executed. That said, interest rates with these “non-bank” lenders can be elevated compared to banks.
Of course, the situation continues to be dynamic. The expectation is that the new presidential administration is going to pull back some of the regulations which should help drive more liquidity in the banking market. As such, traditional banks are actively starting to look for origination opportunities, further diversifying the capital buckets available for borrowers.
Market implications and opportunities
Looking ahead to 2025, there are a wide breadth of opportunities out there for savvy borrowers. High-cost but flexible financing terms from private lenders can open doors to projects that were previously out of reach.
This is the year to be creative in how you’re structuring your capital stack. There are so many vehicles out there that meet different needs, including preferred equity and mezzanine debt. We’ve even seen some brands offer their balance sheet on the development side as a credit enhancement to reduce a project’s risk profile.
One interesting trend we’ve noticed is that big brands are offering more key money. Key money can take the form of cash, a loan or deferred fees, and it has always been a part of hotel development. However, over the past couple of years, with elevated interest rates hindering brand growth, this is one way to spur development activity. It helps take some of the pressure off the lender and improves deal metrics. Expect to see more key money in play in 2025, especially considering the new brands that launched at ALIS in January.
All that said, not every market is created equal — it’s going to be harder to get financing for projects in the Midwest and other tertiary markets than it will be if your project is on a coast or in the Sunbelt. This is because so much of the hotel financing from non-traditional lenders is yield-driven.
Strategic considerations for borrowers
When approaching a lender with a proposal, do everything possible to showcase expertise, track record, and relationships. Lenders are in the business of managing risk, and it’s the borrowers with strong track records and a deep understanding of the industry who are the “best bets,” so to speak.
Outside of experience, most lenders are targeting a 12% debt yield on stabilized hotel assets to ensure sufficient cash flow coverage in a high-rate environment. This metric, calculated as net operating income divided by loan amount, helps lenders gauge the risk-adjusted return on their capital.
Borrowers should also prepare to take full advantage of the diversity of capital available right now. Don’t put all your eggs in one basket — the winds can change and the one lender you were working with may decide to no longer do deals in the hotel industry. Then you’re caught flat-footed without other lending options. Make an effort to build relationships in different parts of the capital markets, from regional banks to debt funds.
Last but not least, become familiar with different loan agreements and structures. When dealing with private lenders, be sure you understand the ins and outs of prepayment penalties, exit fees and performance thresholds. Not every loan is the same, and you need to understand the nuances of what you’re signing.
Finding the right fit
Throughout the rest of 2025, borrowers who take a strategic approach — leveraging diverse capital sources, structuring deals creatively and demonstrating strong performance — will have the best access to financing. The hotel capital markets remain dynamic, and those who stay ahead of the shifts will be best positioned to capitalize on new opportunities.
Ryan Bosch is principal at Arriba Capital and a seasoned expert in hospitality debt and structured finance, managing a portfolio exceeding $2 billion across 140 deals.
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