By Ryan Bosch
Ask any hotel developer today, and you’ll hear the same thing: the market is tough. Capital is scarce, construction costs are high, labor is tight and interest rates remain stubbornly elevated. With yields compressed and underwriting more difficult, it’s no wonder most developers have hit pause and are waiting for better conditions.
But there are signs of movement. We’re starting to see construction financing open up again, selectively, and for the right projects. Lenders are still cautious, but they’re back at the table. And while today’s rates are significantly higher than what we saw in the last cycle, we believe this elevated rate environment is here to stay, at least for the foreseeable future. Developers who continue to wait for a return to ultra-low rates may be waiting a long time.
For those who understand how to navigate this kind of market, this may be one of the best windows in years to get a deal off the ground.
The opportunity in limited supply
Supply growth across the hotel industry is trending near historic lows. While plenty of projects remain in the pipeline, very few are actually moving forward. At the same time, demand continues to normalize and, in some markets, accelerate, creating a unique window for those who can deliver new product while the rest of the market holds back.
Time and again, we’ve seen this dynamic reward those who are willing to build during periods of dislocation. Developers who broke ground in the early 2010s after the Global Financial Crisis were well-positioned to ride the upswing of the mid-2010s. The same thing happened in the aftermath of the dotcom crash and 9/11. Even going back to the 1980s and 1990s, tight credit and high rates limited development, which in turn led to scarcity value and strong performance for the few who moved forward. In down markets, those who build often open into a recovery, with the newest and most compelling assets on the market.
Picking the right project
Of course, not every deal is a good one. Developers who succeed in challenging markets are intentional about where they build and what they build.
Markets with high barriers to entry, whether due to land constraints, zoning hurdles or elevated construction costs, tend to be more resilient. Look for locations with long-term demand drivers: diverse economies, large healthcare systems, university hubs or strong inbound migration. While many Sunbelt markets continue to benefit from these trends, there are compelling submarkets all over the country that meet the criteria.
Product type matters as well. Consumer preferences continue to evolve, and travelers today are seeking more than just a place to sleep. Lifestyle brands, soft-branded hotels and well-designed upper-upscale concepts are resonating with both guests and investors. We’re also seeing momentum in conversion and adaptive-reuse projects, particularly those that repurpose underutilized office buildings in walkable, urban areas. Creativity, in many cases, is winning over standardization.
Why new still beats existing
In uncertain times, it can be tempting to pursue acquisitions, especially when older hotels are trading below replacement cost. But many of those assets come with hidden risks: higher operating costs, deferred maintenance, brand fatigue and renovation requirements that can be both expensive and disruptive.
New developments offer a cleaner slate. They’re more efficient to operate, better aligned with current traveler expectations and generally more attractive to institutional capital. Many REITs and private equity firms place a premium on newly built assets, and some lenders simply won’t finance properties built before 2005. When it comes to long-term value and exit strategy, newer properties offer more flexibility and upside.
The strategic contrarian
There’s no question: this is a challenging environment for hotel developers. But the developers who choose to act strategically, rather than react emotionally, stand to benefit the most when the market inevitably turns.
While construction lenders are starting to re-enter the space, equity investors remain largely cautious. Most are watching and waiting, hesitant to commit until they see more conviction in the capital markets. But that creates an opening: the developers who are actively planning today, locking in land, refining their designs and building capital relationships, will be the ones best positioned to move quickly when equity comes back.
When that moment arrives, and it will, the advantage will belong to those who didn’t wait for perfect conditions but prepared for them.
Ryan Bosch, principal at Arriba Capital, is a seasoned expert in hospitality debt and structured finance, managing a portfolio exceeding $2 billion across 140 deals.
This is a contributed piece to Hotel Business, authored by an industry professional. The thoughts expressed are the perspective of the bylined individual.
