Hotel real estate continues to send mixed signals in 2025. While easing inflation and lower rates are fueling optimism across the broader REIT market, hotels remain stuck in transition. Investor sentiment has been cautious, as sector fundamentals like jobs and valuations have lagged peers.
The thesis is clear: hotel REITs may be the last to recover, but opportunities are emerging through refinancing, hotel conversion, and eventual rate relief. For patient investors and adaptive operators, this transitional moment could mark the start of a longer-term rebound.
Hotel REIT Performance & Valuations
Year-to-date, hotel REITs are down roughly 10–12%, trading at about 6x FFO, placing them near historically low multiples. This discount is stark when compared to sectors like healthcare (+20% YTD) and infrastructure (positive YTD).
Take Apple Hospitality (APLE) as a case study. Despite modest RevPAR growth and flat occupancy, the company continues to generate stable fundamentals. APLE has also repurchased shares, signaling management’s confidence in its balance sheet strength.
Investor sentiment toward hotels reflects a “last-to-recover” narrative, yet this very discount could present a valuable opportunity. Historically, when hotels trade at such depressed multiples, long-term buyers who enter during trough cycles are well-positioned for outsized returns when travel demand normalizes.
Operational Trends in Hotel REITs
Recent updates from top hotel REITs paint a picture of stability, if not robust growth:
- APLE: August occupancy fell 1–2% YoY, though July saw a modest +1% RevPAR boost thanks to the holiday calendar.
- DiamondRock (DRH): July–August RevPAR was modestly better than expected, though management still forecasts a low-single-digit decline for 3Q25.
- Pebblebrook (PEB): Operating metrics remain in line with forecasts; Labor Day weekend saw +185 bps YoY occupancy growth.
- RLJ Lodging (RLJ): Underperforming the group, with EBITDA guidance falling short of consensus. Upscale limited-service hotels remain the weakest sub-segment.
The key takeaway: demand is steady, not accelerating. While growth is muted, resort-driven leisure demand and steady urban performance continue to provide a baseline of support for fundamentals.
Capital Markets & Refinancing Activity
Despite macro uncertainty, refinancing activity in hotels has shown resilience:
- Pacifica Hotels refinanced a seven-hotel portfolio ($126M) at a 7.22% fixed rate, achieving strong debt service coverage ratios (DSCR of 1.8x) and NOI yields near 13%.
- KSL Capital Partners refinanced two Hawaii hotels with a complex package including a $325M CMBS loan and three mezzanine tranches. Despite leverage, DSCR metrics remain acceptable, reflecting lender confidence in well-located, high-quality assets.
These deals highlight two points: lenders remain selective but willing to deploy capital into strong markets, and borrowers are increasingly using creative financing structures to adapt to today’s rate environment.
Labor Market Pressures
The U.S. Bureau of Labor Statistics recently issued a downward revision of 176,000 jobs in the hospitality sector, underscoring lingering labor market challenges. Hotels remain ~150,000 jobs below pre-COVID employment levels, even as travel demand inches higher.
This shortfall translates into operational pressure: higher wages, tighter scheduling, and leaner staffing models. For operators, striking the balance between service quality and cost control remains one of the most pressing challenges of 2025.
Conversions as a Growth Strategy
With new hotel development constrained by high financing and construction costs, conversions have surged as a preferred strategy. In 2024, ~1,100 hotels converted—slightly higher than the prior year but still below the long-term average of ~1,800.
Conversions allow owners to reposition properties faster and at a lower cost compared to ground-up development. Owners are increasingly reflagging independents into branded systems, or switching from one flag to another, to improve performance before eventual sale.
This “bridge strategy” has become especially attractive: an independent hotel might convert to a brand in order to boost its valuation ahead of a transaction, creating a compelling exit story.
Macroeconomic Backdrop: Rates & Inflation
The Producer Price Index (PPI) declined by -0.1% in August 2025, signaling easing inflation pressures. This surprise drop increases the likelihood of a Fed rate cut later this month.
For hotel real estate, the implications are direct: lower borrowing costs would ease refinancing pressures and potentially unlock deal activity in both acquisitions and conversions. Combined with steady travel demand, this could provide the sector with much-needed tailwinds heading into 2026.
Outlook for Hotel Real Estate in 2025
The hotel real estate sector in 2025 is best described as transitional. On one side, headwinds remain—labor shortages, weak investor sentiment, and below-average REIT valuations. On the other, refinancing successes, steady operational performance, and increasing conversions point toward opportunity.
Looking ahead, improving travel demand into Q4, combined with potential rate relief, could provide the catalysts investors have been waiting for. While hotels may be the last REIT sector to fully recover, this transitional moment offers a rare entry point for patient investors.
At NewGen Advisory, we specialize in hotel transactions nationwide. Whether you’re evaluating a conversion, refinancing, or considering a sale, our team has the expertise to guide you through today’s evolving market. Contact us today to explore how we can help unlock the full potential of your hotel investment.