2025 Hotel Construction Outlook: Rates, Risk, and The Rise of Private Credit
By Shivan Perera
How Will Rates Impact Hotel Construction
Most experts predict that the Feds will move rates downward in the second half of 2025 however the cuts are expected to be gradual. The cautious approach by the Feds could lead to ongoing volatility in interest rates throughout the year.
The direction of interest rates will depend on a mix of economic indicators and policy decisions. If inflation continues to ease, it may cause the Federal Reserve to lower its benchmark rate, which typically brings down other borrowing costs. However, ongoing and volatile inflationary pressures, such as those caused by tariffs, could potentially lead the Fed to delay cuts. Economic growth also plays a role. A slowdown could push the Fed to cut rates, while strong employment data might cause it to hold steady. Mortgage rates, which closely follow the 10-year Treasury yield, are further influenced by broader fiscal policies and concerns over government deficits, which can drive long-term yields and mortgage rates higher.
In the hospitality industry we are seeing a mix of pent-up anticipation and optimism that rates will move in the right direction. The question that remains to be seen is whether the shift is going to have a meaningful impact on the robust US hotel construction pipeline.
Construction Pipeline and Market Liquidity
By the end of 2024, the U.S. hotel construction pipeline exceeded 6,300 projects across all stages a figure that reflects unprecedented growth compared to recent years. The most significant surge was in early planning, suggesting that sponsors remain at least cautiously optimistic about the future of hotel development (Construction Today ). Whether this momentum is primarily driven by expectations of falling interest rates and how cost variables such as taxes, insurance, labor etc remains to be seen. However, industry reports point to a clear uptick in both ground-up development and major renovations, fueled by continued economic resilience, US migration patterns and strategic investment in markets where RevPAR performance supports new supply.
In 2025, banks are selectively financing hotel construction deals, though with far more scrutiny than in prior cycles. Traditional lenders have re-entered the space, but they’re prioritizing experienced borrowers, top-performing locations, and conservative capital structures. Loan-to-value ratios are tighter, and banks are generally unwilling to stretch beyond 60% of project cost. As a result, developers can rarely rely on bank financing alone to close the gap.
To round out the capital stack, sponsors are increasingly incorporating mezzanine debt, C-PACE financing, and private credit solutions. Banks typically provide senior construction loans at rates ranging from 6.5% to 9%, while alternative lenders fill the remaining gap with mezz or PACE tranches priced at higher yields. The result is a blended cost of capital in the 7–9% range which is manageable for projects with strong fundamentals and sound execution plans. In this environment, success hinges not just on capital availability, but on a developer’s ability to structure and navigate a multi-tiered financing strategy.
Private Lenders are Becoming Essential
While banks have traditionally been the most cost-effective source of construction capital, today’s market dynamics make them a less viable option for many developers. Bank lending has tightened significantly in the wake of rising interest rates, stricter regulatory oversight, and ongoing liquidity constraints. Hospitality assets face heightened scrutiny due to pandemic-era performance volatility, deferred maintenance, and depressed valuations. As a result, even well-qualified sponsors are finding that bank financing is either unavailable or burdened with overly conservative terms that slow down execution.
In this environment, non-bank lenders, despite higher headline rates, offer a strategic advantage. They move faster, underwrite more flexibly, and focus on the real asset value and business plan, rather than just sponsor liquidity or trailing performance. For hotel construction and conversion deals, where timing is critical, brand commitments have milestones, and construction windows are tight, speed and certainty of close are often more valuable than a few hundred basis points of savings.
Additionally, many of today’s private debt providers structure their loans around the business plan itself offering interest-only terms, flexible prepayment, and built-in interest reserves that protect the sponsor’s cash flow through stabilization. The cost of delay, lost brand incentives, or missed market timing far outweighs the marginal rate premium. In short, while short-term debt from private lenders may come at a higher price, it often delivers a better risk-adjusted outcome by enabling sponsors to control the asset, execute the plan, and refinance into permanent capital once stabilized.
With traditional banks pulling back from hospitality lending, private lenders have stepped in to fill a critical gap, particularly for construction, conversion, and reposition deals. While these lenders typically charge higher interest rates, they offer speed, flexibility, and a more pragmatic approach to underwriting. That said, private capital is still highly selective. Understanding what these lenders look for is essential for any hotel developer seeking to secure funding in today’s environment.
Sponsorship Strength Remains the Foundation
As with any cycle or deal the most important factor is the sponsor behind the deal. Private lenders look for developers with a demonstrated ability to execute, ideally with experience similar in nature of their project. A strong personal balance sheet also matters. Even if the budget includes a contingency or interest reserve, lenders want to know that the sponsor has the financial capacity to absorb unforeseen cost overruns or timeline delays. Just as critical is the sponsor’s alignment with the project: meaningful equity contributions, personal guarantees (when applicable), and day-to-day involvement send a strong message to the lender, all of which indicate commitment to the project.
Brand is a Determining Factor in Credit
A recognized hotel brand can significantly de-risk a construction project but not all flags are created equal. Some offer stronger reservation systems and drive a higher percentage of direct bookings, reducing reliance on OTAs that erode operating margins. Others command higher per-key valuations, supporting stronger appraisals and exit strategies. Some boast lower operating costs, making them more attractive to institutional investors. Additionally, brands often cater to specific guest segments with distinct behavior patterns. Choosing the right flag isn’t just about name recognition, it’s a strategic decision that influences underwriting, investor and lender perception, and long-term asset performance.
Importance of Location
Location remains a focal point in hotel underwriting (and all CRE). Lenders continue to prioritize visibility, accessibility, and proximity to key demand drivers whether it’s an airport, hospital, university, or major business district. But beyond physical location, lenders are increasingly focused on product-market fit. The chosen brand and flag need to make strategic sense within the context of the local market.
It’s not enough to simply pick a well-known brand, lenders are looking for thoughtful positioning and evidence that the sponsor understands who they’re building for. This level of insight helps lenders assess whether the project’s projected occupancy and average daily rate (ADR) are achievable, and whether the market fundamentals can support long-term performance.
Furthermore, with volatility and stagnant growth in many geographies, there are fewer and fewer markets that are feasible to develop in. In the preliminary review stage, a deal may seem as if it may pencil out, however lenders often will utilize 3rd party construction review firms to ensure that the construction bids are accurate to what a GC can deliver in a particular market.
A Transparent and Balanced Capital Stack
Private lenders typically lend up to 70 percent loan-to-cost range and expect the sponsor to contribute meaningful equity that keeps them tied to the project. They’re generally comfortable with additional layers of capital such as mezzanine loans, PACE financing, or preferred equity but will want to carefully review intercreditor agreements and repayment structures. Clear documentation and transparent alignment among capital providers are key to getting lender buy-in. Often capital stacks may be facilitated by the lender or brokers to ensure the right partners are brought together.
Exit Strategy is Non-Negotiable
Because private lenders operate on short-term horizons, typically 12 to 36 months, they place a high premium on a well-articulated exit strategy. Whether the plan involves refinancing into long-term agency, conventional, SBA, or a sale to another investor, lenders want to understand how and when they will be repaid. They will often model exit scenarios based on stabilized debt yields usually targeting a minimum of 10 to 12 percent so it’s important that your business plan supports this level of performance within a reasonable timeframe and considers realistic refinance rates that are in line with market and not premised on rate speculation.
Doing the Math: Why Higher Construction Loan Rates Aren’t Deal-Killers
In today’s capital markets, borrowers often balk at the double-digit interest rates quoted by private lenders for construction financing. It’s understandable rates north of 10% can feel steep, especially when compared to the single-digit rates banks offered in prior cycles. But for hotel developers, focusing solely on interest rates can be misleading. When structured properly, higher-cost construction debt has a limited impact on the overall project IRR, particularly when interest is only paid on drawn proceeds and the project stays on schedule. Headline rates aren’t as punitive as they may seem, private capital can be the right strategic choice in today’s lending environment.
The True Cost of Drawn Proceeds
Unlike permanent loans, construction debt is drawn down gradually. Capital is released in tranches as work progresses, which means the borrower only pays interest on the amount disbursed, not the full commitment.
Take, for example, a $20 million construction loan at 12% interest-only over an 18-month construction period. If draws are distributed evenly over time, the average loan balance might be closer to $10 million. In this case, the total interest expense is approximately $1.8 million, not the $3.6 million suggested by the full loan amount. When averaged over the construction period, the realized cost of capital falls closer to 6–7%, making it far more manageable within the context of the broader project economics.
Many development proformas miss this nuance. They tend to model interest against the full loan amount, which overstates the impact of financing costs and underappreciates the flexibility and certainty that private lenders provide.
Short-Term Capital, Long-Term Payoff
Construction loans are, by design, short-term instruments. In most hotel deals, they remain in place for 24 to 36 months, just long enough to fund construction and early-stage ramp-up. Once the hotel is operational and nearing stabilization, the debt is typically eligible for permanent financing or paid off through a sale.
With average investment horizons in hospitality ranging from five to seven years, the construction loan is merely a temporary cost of execution. In that context, the incremental interest expense is often dwarfed by the potential opportunity cost of delaying a project, whether due to rising construction costs, expiring brand approvals, or missed seasonal demand cycles. Waiting for a marginally cheaper loan often results in far greater financial losses than moving forward with higher-cost, reliable capital.
What Actually Moves the IRR Needle
Despite the emphasis on rate, a hotel sponsor’s internal rate of return is far more sensitive to other variables. Among them are the total equity basis, execution risk during construction, cost overruns, mis-budgeting working capital and eventual exit valuation. A sponsor who can deliver the project on time and on budget, particularly under a strong flag, in a well-positioned market will often still achieve target IRR’s even with a 12% construction loan.
What’s more critical is structuring the loan correctly from the outset. That typically means incorporating an interest reserve, building in realistic contingency, and aligning the debt service schedule with the project’s ramp-up period. Provided there is an accurate cost basis in place from the outset, the temporary cost of capital becomes a small price to pay for timely delivery and long-term value creation.
Certainty and Partnership Make up the Competitive Edge
In today’s market, certainty of execution is often more valuable than cost of capital. Private lenders offer fast decisions, streamlined closing timelines, and tailored loan structures that match the realities of hotel development. For sponsors managing franchise deadlines, entitlement windows, and construction resource constraints, that reliability can unlock significant competitive advantages.
While the sticker shock of a double-digit construction rate is real, the broader context reveals a different picture. The true cost is lower than it seems, the time savings are measurable, and the impact on IRR is often negligible especially when weighed against the benefits of getting the project financed and delivered on schedule.
When managing multiple projects across different stages, entitlements, brand approvals, contractor timelines, and site work, time doesn’t just kill deals, it kills momentum. Private lenders excel in this environment, offering faster decisions, fewer layers of bureaucracy, and far more predictable closings. Unlike traditional banks, which often take months and may re-trade terms late in the process, private lenders are built for execution. They understand construction risk, underwrite to the business plan, and often fund within weeks allowing developers to maintain velocity and hit critical development milestones across a broader pipeline.
Another major advantage is the ability to form programmatic relationships. For developers with an active pipeline, sourcing capital on a one-off basis for every deal becomes inefficient and burdensome. A strong relationship with a private lender means having a capital partner who knows your track record, underwrites your platform, and is prepared to finance multiple projects under a consistent framework. This streamlines documentation, reduces diligence friction, and gives developers the ability to plan with confidence whether they’re executing three deals a year or ten.
In Conclusion
As we look ahead, much of the hotel construction market’s trajectory will hinge on the path of interest rates. While most forecasts expect the Federal Reserve to begin easing rates in the second half of 2025, any cuts are likely to be slow and deliberate. This cautious approach may lead to continued volatility throughout the year, making it difficult for developers to time the market with precision. For now, the consensus in the hospitality sector is one of guarded optimism, there’s hope that lower rates will provide a tailwind, but no guarantee that those shifts will meaningfully accelerate project starts. In this environment, developers must continue building capital stacks that work in today’s rate climate, rather than waiting for tomorrow’s.
For developers with a real pipeline not just one-off projects, capital efficiency isn’t about the cheapest rate, it’s about the most reliable capital source. Private lenders offer that reliability. They move quickly, scale with you, and build structures around the realities of hotel development.
Today securing financing is less about rate shopping and more about assembling a thoughtful, creditworthy capital stack. Successful developers are engaging local or relationship-based lenders early, supplementing traditional financing with structured alternatives, and leveraging their track records to push deals through the pipeline. For hotel projects, especially, construction capital is available, but it takes a strategic, multi-tranche approach to bring it together.
Mr. Perera
Shivan Perera is a commercial real estate finance professional with over a decade of experience in structured finance, capital markets, and sales strategy. He currently serves as Managing Director at Bridge, a hospitality-focused mortgage platform, where he oversees originations and capital partnerships across hotel construction, conversion, and bridge lending. Mr. Perera began his career in business banking before going on to lead originations and sales strategy for a national debt fund specializing in middle-market hospitality assets. He also headed the participations desk at a credit union service organization (CUSO), facilitating nationwide CRE lending partnerships and loan participations across a broad network of credit unions. With deep expertise in hotel/CRE financing, multi-layer capital structuring, and institutional investor engagement, he is a frequent advisor to sponsors and lenders in the hospitality industry.
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