Hotel Underwriting: RevPAR, ADR, and the Departmental P&L That Drives Institutional Hotel Investment

Key Takeaways

RevPAR, ADR, and Occupancy

Hotel underwriting starts with three metrics. They are simple in formula and complex in application. Every institutional hotel analysis, every STR report, every lender sizing model, and every appraisal begins with these three numbers.

Average Daily Rate (ADR) is total rooms revenue divided by the number of rooms sold. If a 200-room hotel sells 144 rooms tonight and collects $25,920 in room revenue, ADR is $180. ADR measures pricing power. It tells you what the market will pay for a room at this hotel on a per-night basis. ADR does not account for unsold rooms. A hotel with 50% occupancy and a hotel with 95% occupancy can have the same ADR if they price identically on occupied nights.

Occupancy is rooms sold divided by rooms available. If that same 200-room hotel sells 144 rooms, occupancy is 72%. Occupancy measures demand capture. It tells you what share of available inventory the hotel is actually filling. Occupancy is bounded by zero and 100%. In practice, stabilized urban hotels run 70% to 80% occupancy, resort hotels run 60% to 75%, and extended-stay hotels run 75% to 85%. Occupancy above 85% on a sustained basis usually means the hotel is underpricing its rooms and leaving rate on the table.

Revenue Per Available Room (RevPAR) combines the two. RevPAR equals ADR multiplied by Occupancy. Equivalently, RevPAR equals total rooms revenue divided by total available rooms. Using the example above: $180 ADR times 72% Occupancy equals $129.60 RevPAR. RevPAR is the single number that captures both pricing and demand. Two hotels can achieve the same RevPAR through different combinations: Hotel A at $200 ADR and 65% occupancy ($130 RevPAR) versus Hotel B at $160 ADR and 81% occupancy ($130 RevPAR). The RevPAR is identical but the operating profiles are different. Hotel A has rate upside but demand risk. Hotel B has occupancy stability but limited pricing power.

The formulas are worth stating explicitly because practitioners use them in two directions. Forward underwriting starts with occupancy and ADR assumptions to derive RevPAR and rooms revenue. Reverse underwriting starts with a target RevPAR (often derived from STR competitive set data) and tests which occupancy/ADR combinations achieve it.

Two related metrics appear in institutional hotel analysis. GOPPAR (Gross Operating Profit Per Available Room) divides GOP by available room-nights and measures operating profitability after all departmental and undistributed expenses. GOPPAR is what separates a well-managed hotel from a poorly managed one at the same RevPAR level. NRevPAR (Net Revenue Per Available Room) subtracts distribution costs (OTA commissions, loyalty program costs, travel agent fees) from rooms revenue before dividing by available rooms. NRevPAR captures the true net yield per room after customer acquisition costs, which can run 15% to 25% of rooms revenue at OTA-dependent properties.

The STR Competitive Set

Underwriting a hotel in isolation is guesswork. The STR STAR report is the institutional standard for benchmarking hotel performance against a defined competitive set. STR, now a division of CoStar Group, collects daily operating data from approximately 84,000 hotels worldwide and produces monthly and annual benchmarking reports that compare a subject hotel's performance to its comp set.

Constructing the competitive set is an underwriting judgment call, not a mechanical exercise. The comp set typically includes 5 to 10 hotels that compete directly with the subject property for the same demand. Selection criteria include chain scale (economy, midscale, upper midscale, upscale, upper upscale, luxury), service level (limited, select, full), geographic proximity (usually within a defined submarket or radius), age and condition, and meeting space capacity. A 150-room Courtyard by Marriott in a suburban office corridor competes with the Hilton Garden Inn, Hyatt Place, and Hampton Inn in the same submarket. It does not compete with the 400-room full-service Marriott downtown, even though both carry Marriott flags.

The STAR report produces three index values that are central to hotel underwriting. Each index compares the subject hotel's performance to the weighted average of its competitive set:

• Occupancy Index (also called MPI, or Market Penetration Index). Subject occupancy divided by comp set occupancy. An index above 100 means the hotel is capturing more than its fair share of demand. Below 100 means it is underperforming relative to the set.
• ADR Index (also called ARI, or Average Rate Index). Subject ADR divided by comp set ADR. An index above 100 means the hotel commands a rate premium versus comps. This premium may reflect better physical condition, stronger brand, better location, or superior revenue management.
• RevPAR Index (also called RGI, or Revenue Generation Index). Subject RevPAR divided by comp set RevPAR. This is the composite measure and the single most important index. An RGI above 100 means the hotel is generating more rooms revenue per available room than its competitive set average. The RGI captures both pricing power and demand capture in a single benchmark.

When underwriting an acquisition, the RGI tells you whether the hotel is punching above or below its weight. A hotel with a 95 RGI that you believe should be operating at 105 after a renovation and repositioning has identifiable upside. That 10-point RGI improvement, applied against the comp set's RevPAR trajectory, gives you the revenue growth assumption for your pro forma. A hotel already running a 115 RGI has limited upside from market share gains and must rely on absolute market RevPAR growth for revenue growth.

The comp set also anchors your seasonality assumptions. Monthly RevPAR for the comp set shows the demand pattern for the submarket. A hotel in a beach resort market may show RevPAR of $220 in February and $85 in September. The subject hotel's monthly RevPAR pattern should track the comp set pattern, adjusted for its index position. If it deviates meaningfully from the comp set pattern (for example, outperforming in shoulder months but underperforming in peak months), that deviation needs an explanation and usually points to rate management or group booking patterns that are worth investigating.

The USALI Summary Operating Statement

The Uniform System of Accounts for the Lodging Industry, now in its 12th revised edition, is the standard chart of accounts for institutional hotel financial reporting. Published by the Hotel Association of New York City and the American Hotel & Lodging Educational Institute, USALI has been adopted globally. Every institutional hotel owner, operator, lender, appraiser, and buyer expects financial statements organized in this format. USALI is to hotel underwriting what the Form 1040 is to tax preparation: the structure through which all numbers flow.

The USALI summary operating statement follows a specific cascade. Revenue flows through four layers of cost deduction to arrive at NOI. Understanding this cascade is the foundation of hotel underwriting.

The cascade works as follows. Total revenue includes all operated department revenue: rooms, food and beverage, and other operated departments (parking, spa, resort fees, telecommunications, and any other revenue-generating activity). From total revenue, you subtract departmental expenses (the direct costs of running each department: housekeeping labor and supplies for rooms, cost of goods sold and kitchen labor for F&B, and so on) to arrive at total departmental profit. From departmental profit, you subtract undistributed operating expenses (administrative and general, sales and marketing, property operations and maintenance, utilities, and information technology) to arrive at gross operating profit (GOP). From GOP, you subtract management fees, property taxes, insurance, and the FF&E (furniture, fixtures, and equipment) reserve to arrive at NOI.

This cascade is not just an accounting exercise. Each layer represents a different underwriting question. Departmental margins tell you whether the hotel is operationally efficient at the department level. Undistributed expenses tell you whether the hotel's overhead is appropriate for its size and complexity. Fixed charges tell you what the hotel costs to hold regardless of revenue performance. Separating these layers is what makes it possible to identify where value creation (or destruction) is happening.

Departmental Revenue and Margins

The rooms department is the engine of hotel profitability. At a select-service hotel, rooms revenue typically represents 85% to 92% of total revenue. At a full-service hotel with significant food and beverage, meeting space, and ancillary revenue, rooms revenue may represent 55% to 70% of total revenue. Regardless of the hotel type, the rooms department produces the highest margin of any operated department.

Rooms Department

Rooms department revenue is straightforward: rooms sold multiplied by the average rate achieved per room-night. The departmental expenses are primarily labor (housekeeping, front desk, reservations) and operating supplies (linens, amenities, cleaning supplies). At a well-managed select-service hotel, rooms department profit margins range from 73% to 78% of rooms revenue. Full-service hotels with higher service standards (concierge staff, turndown service, more labor-intensive housekeeping) run 68% to 74%.

The rooms department margin is sensitive to two variables: occupancy and labor cost per occupied room. Higher occupancy spreads fixed labor costs (front desk staff, maintenance, management) across more occupied rooms. But each incremental occupied room adds variable labor cost (housekeeping, roughly 25 to 35 minutes per room per day at select-service hotels). The marginal cost of filling one additional room is approximately $25 to $40, meaning that incremental rooms revenue at any ADR above $40 flows through at extremely high margins. This is why hotel operators focus relentlessly on occupancy at properties below 70%: the marginal contribution to departmental profit is enormous.

Food and Beverage Department

Food and beverage (F&B) is the second-largest revenue department at full-service hotels and the most misunderstood line in hotel underwriting. F&B includes restaurant revenue, bar/lounge revenue, banquet and catering revenue, room service, and minibar. At a full-service hotel, F&B can represent 25% to 35% of total revenue. At a select-service hotel with a limited breakfast offering and perhaps a bar, F&B represents 5% to 12% of total revenue.

F&B margins are structurally lower than rooms margins. Departmental profit margins for F&B typically range from 25% to 35%. The cost structure is fundamentally different from rooms. Cost of goods sold (food and beverage product costs) runs 28% to 35% of F&B revenue. Labor runs 35% to 45%. By the time you add supplies, equipment, and contract services, the margin compresses to a level that would be unacceptable in any standalone restaurant business. Hotels operate F&B not for its stand-alone profitability but because it supports room rate and occupancy (group business requires meeting space and catering, business travelers expect an on-site restaurant, and resort guests expect dining options).

Banquet and catering revenue is the highest-margin subcategory within F&B. Banquet margins of 35% to 45% are achievable because banquet labor is largely variable (event staff hired per event), menu pricing has less price transparency than restaurant pricing, and the hotel captures both the food/beverage revenue and the meeting space rental. A hotel with strong group business and a catering-driven F&B operation will show meaningfully better F&B margins than one that relies on a la carte restaurant revenue.

Other Operated Departments

Other operated departments include parking, spa, golf, retail, telecommunications (now largely irrelevant), resort fees, and any other revenue-generating activity. Margins vary widely. Parking operations run 80% to 90% margins (essentially all flow-through after attendant labor). Spa margins run 20% to 35%. Resort fees, where applicable, run near 100% margin because the costs they nominally cover are already baked into base operating expenses. Golf course operations are typically break-even or slightly negative on a direct departmental basis, justified by their contribution to room rate and real estate value.

In aggregate, other operated departments at a full-service resort may generate 10% to 15% of total revenue. At a select-service hotel, they are negligible. The underwriting question is whether these departments are additive to value or just overhead masquerading as revenue. If parking revenue is $500K per year at 85% margin, it contributes meaningfully to NOI. If the spa generates $300K at 15% margin after a $2M buildout, the return on invested capital does not justify the space.

Undistributed Expenses and Fixed Charges

Undistributed operating expenses are costs that support the entire hotel but cannot be attributed to a single revenue-generating department. Under USALI, these include five categories:

• Administrative and General (A&G). Back-office costs including accounting, human resources, legal, credit card commissions, and general management salaries. Typically 7% to 10% of total revenue. Credit card processing fees alone can run 2.5% to 3.5% of rooms revenue as OTA-booked reservations often incur both OTA commissions and credit card fees.
• Sales and Marketing. Direct sales staff, advertising, loyalty program costs, and OTA commissions. Typically 6% to 10% of total revenue. OTA commissions (15% to 25% of room revenue for bookings through Expedia, Booking.com, and similar platforms) are the fastest-growing component. Hotels with strong brand direct booking channels run lower sales and marketing expense ratios.
• Property Operations and Maintenance (POM). Engineering staff, contract maintenance, supplies, and routine repairs. Typically 4% to 6% of total revenue. Higher for older hotels and hotels with extensive mechanical systems (full-service hotels with pools, commercial kitchens, HVAC systems for meeting space).
• Utilities. Electric, gas, water, sewer. Typically 3% to 5% of total revenue. Highly variable by geography and property type. Hotels with pools, laundry facilities, and large HVAC loads run at the upper end.
• Information Technology. Property management system (PMS), point-of-sale systems, guest Wi-Fi, and IT support. Typically 2% to 3% of total revenue. Rising as hotels invest in mobile check-in, keyless entry, and revenue management systems.

In total, undistributed operating expenses typically run 25% to 35% of total revenue. The sum of departmental profit margins and undistributed expense ratios determines the GOP margin. A hotel with a 69% departmental margin and 30% undistributed expense ratio produces a 39% GOP margin.

Fixed Charges

Fixed charges sit below GOP and above NOI. They include:

• Management fee. Typically 3% to 4% of total revenue for a base management fee, plus an incentive fee of 10% to 15% of GOP or NOI above a threshold. In institutional hotel underwriting, the base management fee is treated as an operating expense (above the NOI line). The incentive fee treatment varies by buyer and lender. Some treat it above the line (reducing NOI), some treat it below the line (reducing cash flow to equity but not NOI). Know your buyer's convention before quoting an NOI number.
• Property taxes. Highly variable by jurisdiction. Typically 2% to 4% of total revenue. Hotels in high-tax jurisdictions (New York City, San Francisco, Chicago) run higher. Be aware that hotel assessments often include not just the real property but also personal property (FF&E), which is assessed separately in many states.
• Insurance. Typically 1% to 2% of total revenue. Higher for hotels in hurricane-prone or earthquake-prone areas. Coastal Florida hotels saw insurance costs more than double between 2021 and 2025.
• FF&E Reserve. A reserve for the periodic replacement of furniture, fixtures, and equipment. The institutional standard is 4% of total revenue, though newer hotels may underwrite 3% in the early years and older hotels may need 5% or more. The FF&E reserve is not a cash expense in the traditional sense. It is either deposited into an escrow account (if lender-required) or modeled as a deduction from NOI to reflect the true economic cost of maintaining the physical plant. Lenders universally deduct it when sizing debt.

The sum of fixed charges typically runs 10% to 14% of total revenue, though the range widens considerably based on management fee structure, tax jurisdiction, and insurance market conditions. Subtracting fixed charges from GOP produces NOI. For underwriting purposes, the NOI number is what flows into cap rate valuation, DSCR analysis, and return modeling.

Worked Example: 200-Room Select-Service Acquisition

Consider the acquisition of a 200-room select-service hotel in a suburban Sun Belt MSA. The property is a 7-year-old Courtyard by Marriott adjacent to a corporate office park with secondary demand from a regional medical center. The asking price is $28M. The trailing 12-month financials are audited and presented in USALI format. Here is the restated P&L, showing both total dollars and per-available-room (PAR) metrics.

Revenue

Rooms revenue of $8.76M implies RevPAR of $120 on 73,000 available room-nights (200 rooms times 365 nights). Working backward: if occupancy is 73% (53,290 rooms sold) and rooms revenue is $8.76M, then ADR is $164.37. RevPAR is $164.37 multiplied by 73%, or $120.00. The STR competitive set for this hotel shows a submarket RevPAR of $115, giving the subject hotel a RevPAR index (RGI) of 104. The hotel is slightly outperforming its comp set.

F&B revenue of $784K reflects a limited-service F&B operation: a grab-and-go market pantry, a small bar/lounge, and complimentary hot breakfast (the cost of which is captured in F&B departmental expenses). Other operated department revenue of $256K includes parking ($180K), vending commissions, and sundry items.

Departmental Expenses and Profit

The rooms department margin of 76% is within the expected range for a well-run select-service hotel. Rooms departmental expenses of $2.10M break down to approximately $1.42M in labor (housekeeping, front desk, reservations, rooms management) and $680K in operating supplies, laundry, and contract services. On a per-occupied-room basis, rooms departmental expense is $39.45 ($2,102,400 divided by 53,290 rooms sold). This is a useful benchmark for comparison against the comp set and against brand standards.

F&B margin of 30% reflects the limited-service F&B model. A full-service hotel with restaurants, banquets, and room service would show lower margins (25% to 28%) on much higher revenue. The 30% margin here is slightly above average because the breakfast program has relatively low labor cost (one or two staff members) and the bar/lounge operation generates high-margin beverage revenue.

Undistributed Operating Expenses

Total undistributed expenses of $2.66M, or 27.1% of revenue, is within the expected range for a select-service hotel. Full-service hotels with larger administrative staffs and higher sales costs typically run 30% to 35%. The sales and marketing line of $735K (7.5% of revenue) includes OTA commissions, brand marketing contribution fees, and local advertising. At a branded select-service hotel like a Courtyard, a significant portion of this line is the brand's marketing and loyalty program assessment, which is non-negotiable under the franchise agreement.

Gross Operating Profit

GOP equals total departmental profit minus total undistributed expenses: $7,027,200 minus $2,655,800 equals $4,371,400. GOP margin is 44.6% of total revenue. GOPPAR is $21,857. This is a healthy GOP margin for a select-service hotel. The CBRE Q1 2026 U.S. hotel figures report median GOP margins of 38% to 42% for upper midscale select-service hotels, so this property is performing above the median.

Fixed Charges and NOI

NOI of $2.95M on a $28M purchase price implies a going-in cap rate of 10.5%. Wait. That is suspiciously high for a 7-year-old branded select-service hotel in a Sun Belt MSA. Hotel cap rates in this segment typically range from 7.5% to 9.5%. A 10.5% cap rate suggests either the property has issues not reflected in the trailing financials (deferred maintenance, upcoming PIP, brand risk) or the market has mispriced the asset. The experienced underwriter does not stop at the cap rate calculation. The cap rate is an output, not an input. The right question is whether the NOI is sustainable and whether the comps support the implied valuation.

Alternatively, if we apply a market cap rate of 8.5% to the $2.95M NOI, the indicated value is $34.7M, suggesting the $28M asking price represents acquisition upside. But this only holds if the NOI is real and repeatable. The underwriting must stress-test the assumptions: What happens if occupancy drops to 65%? What happens if ADR growth stalls? What happens if the property faces a PIP (property improvement plan) requiring $3M in capital expenditure within the next 18 months? These are the questions the departmental P&L equips you to answer.

Seasonality and Monthly RevPAR Modeling

Hotels are not multifamily. There is no annualized rent roll that locks in revenue for 12 months. Hotel revenue resets nightly. Every room is re-priced and re-sold (or left empty) every night. This nightly reset creates seasonality patterns that are materially more volatile than any other commercial real estate asset class.

Monthly RevPAR variation for the example Courtyard by Marriott might look like this. The hotel is in a Sun Belt MSA with corporate demand drivers and secondary leisure demand. Peak months are March and October (mild weather, strong corporate travel). Trough months are December (holiday slowdown) and July (summer slowdown in corporate travel, partially offset by leisure).

The peak-to-trough RevPAR ratio is 1.74x ($145.96 in March versus $84.10 in December). This is moderate seasonality by hotel standards. Beach resorts can show ratios of 3x or higher. Urban convention hotels may show 2x. Extended-stay hotels in stable corporate markets may show only 1.3x.

Why does monthly modeling matter for underwriting? Because debt service is monthly, not annual. A hotel with $2.95M annual NOI and $2.0M annual debt service has a 1.48x annual DSCR. That sounds adequate. But if 35% of the hotel's NOI is generated in two peak months (March and October) and the hotel runs near breakeven in three trough months, the monthly DSCR in December might drop below 1.0x. The hotel needs working capital reserves or a line of credit to cover debt service during trough months. Lenders who underwrite hotels know this and typically require either a debt service reserve fund or a seasonal operating reserve. The amount is usually 3 to 6 months of debt service.

Seasonality also affects the timing of asset sales. Hotels are typically marketed with trailing 12-month financials. A seller who lists in November presents financials that include the strong March and October but have not yet been diluted by the weak December and January. A buyer who closes in January pays a price based on financials that include two peak months that will not repeat for 3 to 9 months. The cash flow in the first quarter of ownership may underperform the underwriting.

Hotel-Specific DSCR and Debt Sizing

Hotel lending is distinct from conventional commercial real estate lending in several respects. The operating volatility inherent in a nightly-reset revenue model, combined with the management-intensive nature of hotel operations and the cyclical sensitivity of travel demand, produces a risk profile that lenders address through higher coverage requirements, shorter loan terms, and more restrictive covenants.

Most institutional hotel lenders require a minimum DSCR of 1.50x on a trailing 12-month basis. Compare this to the 1.25x standard for multifamily and the 1.30x to 1.35x standard for industrial and retail. The 1.50x floor reflects the lender's expectation that hotel NOI can decline 33% before debt service coverage drops below 1.0x. For context, U.S. hotel RevPAR declined 47% during the 2020 pandemic and 17% during the 2008-2009 recession. A 1.50x DSCR does not fully protect against pandemic-level disruption, but it provides a reasonable cushion against a standard recessionary cycle.

Debt yield is the second sizing metric, and for many lenders it is the binding constraint. Debt yield equals NOI divided by the loan amount. Hotel lenders typically require a minimum debt yield of 10% to 12%. Using our 200-room example with $2.95M NOI:

• At a 10% debt yield floor: maximum loan = $2.95M / 10% = $29.5M (which exceeds the $28M purchase price, so LTV becomes the binding constraint)
• At a 12% debt yield floor: maximum loan = $2.95M / 12% = $24.6M (88% of purchase price, so the 65% LTV constraint is still binding)
• At 65% LTV: loan amount = $28M x 65% = $18.2M. DSCR check: $2.95M NOI / debt service on $18.2M at 7.0% on 25-year amortization = $2.95M / $1.55M = 1.90x. This passes the 1.50x threshold.
• Debt yield check: $2.95M / $18.2M = 16.2%. This passes the 10% to 12% threshold.

The loan sizes in all four calculations. The binding constraint for this deal is LTV at 65%. In practice, the lender will size to the most restrictive of LTV, DSCR, and debt yield. The final loan amount is $18.2M, requiring $9.8M in equity.

Hotel loan terms are typically shorter than other CRE asset classes. While multifamily can secure 10-year fixed-rate financing, hotel loans are usually structured with 5-year terms (sometimes 3+1+1, meaning a 3-year initial term with two 1-year extension options subject to performance tests). The shorter terms reflect lender reluctance to take long-term interest rate and credit risk on an operating business. The Federal Reserve's Senior Loan Officer Opinion Survey (SLOOS) consistently reports tighter lending standards for hotel/hospitality loans compared to other CRE property types, even during periods of general credit easing.

Interest-Only Period

Many hotel loans include an initial interest-only (IO) period of 12 to 36 months, particularly for value-add acquisitions or newly developed hotels in their ramp-up period. During the IO period, debt service is lower, improving cash flow to equity during the period when the hotel is stabilizing or implementing operational improvements. But the IO period also means no principal amortization, so the loan balance does not decline. When IO burns off and amortization kicks in, debt service jumps. The jump can be 20% to 30% of the IO-period debt service amount, depending on the amortization schedule. Underwriters must model this transition explicitly and test DSCR at both the IO and amortizing levels.

Cash Management and Lockbox

Hotel lenders almost universally require a hard lockbox (also called a cash management agreement). All hotel revenues are deposited into a lender-controlled account. The lender disburses funds in a specified waterfall: operating expenses first, then debt service, then required reserve deposits (FF&E reserve, tax and insurance escrow, capital improvement reserve), and finally any surplus to the borrower. This structure gives the lender real-time visibility into hotel cash flows and the ability to trap cash if performance deteriorates below specified thresholds (typically a DSCR of 1.25x or a debt yield of 8% to 10%).

2026 Market Data and Segment Divergence

The U.S. hotel market in 2026 is growing, but the growth is uneven across segments. Understanding segment divergence is essential for hotel underwriting because a single national RevPAR growth rate obscures the dramatically different trajectories of luxury, upscale, upper midscale, midscale, and economy hotels.

CBRE's Q1 2026 U.S. hotel figures show the following headline numbers: RevPAR up 3.8% year-over-year, ADR up 2.2%, and occupancy up 0.8 percentage points. These figures represent the aggregate U.S. hotel market. The segment-level data tells a different story.

Upper upscale and luxury hotels are leading the recovery. ADR growth in these segments runs 3% to 5%, driven by sustained demand from high-income leisure travelers and the return of group/convention business. Occupancy in these segments has fully recovered to 2019 levels or above. RevPAR growth in the luxury segment exceeds 5% in many gateway markets.

Upper midscale and upscale select-service hotels (the Courtyard, Hilton Garden Inn, and Hyatt Place segment) are growing moderately. ADR growth of 1.5% to 3.0% and stable occupancy produce RevPAR growth of 2% to 4%. This segment benefits from corporate travel recovery and remains the workhorse of institutional hotel portfolios because of its favorable margin profile and manageable operating complexity.

Economy and midscale hotels are under pressure. The American Hotel & Lodging Association's 2026 State of the Industry report highlights that operating costs (particularly labor and insurance) are rising faster than rate growth in these segments. Economy hotels that depend on rate-sensitive transient demand have limited ability to pass through cost increases. The result is margin compression. NOI growth in the economy segment is flat to negative in many markets, even as RevPAR shows modest positive growth on the top line.

Supply is also a consideration. HVS's 2026 U.S. Hotel Development Cost Survey reports that new construction costs per room have increased 18% since 2022, driven by labor shortages in construction trades and elevated material costs. Higher construction costs have slowed new supply growth, which supports pricing power for existing hotels. The national construction pipeline is running at approximately 2.0% of existing supply, below the long-term average of 2.5% to 3.0%. Markets with supply growth below 1.5% of existing inventory are best positioned for sustained RevPAR growth.

For the underwriter, segment divergence means two things. First, RevPAR growth assumptions must be segment-specific. A pro forma that applies 3% RevPAR growth to an economy hotel will overestimate revenue. A pro forma that applies 2% growth to a luxury urban hotel may underestimate it. Second, expense growth assumptions must account for the labor cost inflation that is compressing margins at the lower end of the chain scale spectrum. The AHLA report estimates that total hotel labor costs per occupied room increased 6.2% in 2025, with housekeeping and F&B labor leading the increase. If your revenue growth assumption is 3% but your expense growth assumption is 6%, your NOI growth is negative. This dynamic is playing out in real time across the economy and midscale segments.

Cap Rate Environment

Hotel cap rates in 2026 reflect both the income risk premium and the prevailing interest rate environment. Institutional-quality select-service hotels in top-50 MSAs trade at 7.5% to 9.0% cap rates. Full-service hotels in gateway markets trade at 6.5% to 8.0%. Economy and midscale hotels trade at 9.0% to 11.0% when they trade at all (many economy transactions are operator-to-operator sales that do not involve institutional capital). The spread between hotel cap rates and multifamily cap rates remains approximately 200 to 300 bps, reflecting the higher operating risk, management intensity, and revenue volatility of hotels relative to apartments.

The cap rate for any individual hotel depends on the stability and predictability of its cash flows. A 300-room Marriott with a long-term management agreement, a diversified demand mix (40% corporate, 30% group, 30% leisure), and a RevPAR index above 110 will trade at a lower cap rate than a 120-room independent hotel with 80% OTA-dependent transient demand and a 90 RevPAR index. The branded hotel's cash flows are more predictable, its demand more diversified, and its operating platform more scalable. The cap rate reflects this.

Model It in Apers

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