Hotel Cap Rates 2025: What Independent Owners Need to Know

Introduction

Cap rates might seem like financial jargon, but for hotel owners and investors, they’re one of the most essential metrics to know. A hotel’s capitalization rate (cap rate) helps determine its value based on income. This isn't only important if you wants to sell/buy a hotel, but also if they are looking to refinance an existing loan, securing a new loan, considering a merger or portfolio sale, restructuring debt, evaluating ROI of renovations and other capital expenditures, handling tax or estate planning, and when you are navigating 1031 exchanges.

In 2025, changing interest rates, rising costs, and evolving travel demand make understanding cap rates more important than ever.

Who publishes cap rate data? Firms like CBRE, HVS, STR, and JLL regularly report on hotel cap rates (and other related metrics). These reports give benchmarks by property type, region, and chain scale. Having a sense of where the market is now helps you make decisions about refinancing, pricing, investment, or sale.

What Are Hotel Cap Rates?

Definition (in layman's terms):

A cap rate is the return on investment you’d expect from buying or owning a hotel, assuming you operate it with stable income and expenses. Think of it as the “yield” – how fast your investment might pay off, ignoring debt and taxes.

Formula:

Cap Rate = Net Operating Income (NOI) ÷ Property Value

Where:

• NOI = Revenue minus operating expenses (excluding debt service, depreciation, amortization, and interest)

• Property Value = The market value or purchase price of the hotel
  
  Alternative / related approaches include “rooms revenue multiplier” (for limited-service hotels, where rooms revenue is a large majority of income) and sometimes using EBITDA (before interest, taxes, depreciation, etc.) less reserves. HVS
  

Why owners & investors care:

• Valuation: Cap rate × NOI = Value. If NOI increases (say via boosting ADR, occupancy, cutting costs), value goes up.
  

• Refinancing or Sales: Lenders or buyers care what cap rates are prevailing; if your cap rate is high vs market, your value is lower; if low, value higher.
  

• Investment benchmarking: Compare your hotel vs others (market, chain scale, geography) to see if you're overpaid or under-earning.

Hotel Cap Rate Trends in 2025

Here are what recent published sources are showing for 2025:

• CBRE’s H1 2025 Cap Rate Survey shows a slight decline in U.S. all‐property cap rates over the first half of 2025. Cap rates had been rising, but many respondents believe we’ve passed the cyclical peak. CBRE+1
  

• Sales volume outlook has been affected by macro factors such as tariffs, interest rates, and volatility in bond yields. CBRE+2LODGING Magazine+2
  

• CBRE’s Global Hotel Outlook expects modest RevPAR growth (~2%) in 2025 in the U.S., largely driven by rate increases, with urban locations expected to outperform suburban/smaller markets. CBRE
  
  

General Segment Trends

Luxury / Upper-Upscale

More stable. Lower cap rates (better pricing power) due to demand for premium experiences and strong ADR growth.

Boutique / Select Service / Extended Stay

More varied. Extended stay tends to perform better as operational costs are more controllable; boutique depends heavily on brand, uniqueness, location.

Secondary / Tertiary Markets

Usually higher cap rates (more risk, lower pricing), but these markets are sensitive to cost pressures.

Urban vs Resort vs Suburban

Urban + gateway cities tend to see more investment and thus lower cap rates if demand is solid. Resort / seasonal properties more volatile (cap rates fluctuate with demand cycles).

What’s Driving Cap Rates in 2025?

Several macro and micro‐factors are shaping cap rates this year. Understanding them helps you estimate where yours might settle, and more importantly, what you can influence.

1. Interest Rates & Lending Environment
   The yield on Treasury bonds, cost of debt, and lenders’ required returns all feed into cap rate expectations. Higher interest rates push required returns up, often pushing cap rates higher (lowering valuations), all else equal. CBRE’s data shows that as bond yields peaked, cap rates rose but are now seeing some compression. CBRE
   
   

2. Travel Demand & ADR Recovery
   Even if occupancy is recovering, ADR (average daily rate) growth helps directly with NOI. Reports show ADR growth is moderate but generally positive in 2025. STR+2CBRE+2
   
   

3. Rising Costs / Operational Pressures
   Labor, insurance, energy, property maintenance, materials (CapEx / renovation) are increasing. If costs rise faster than revenue, NOI is squeezed, which raises cap rate expectations (i.e. investors demand higher yields for risk).
   
   

4. Investor Sentiment & Risk Premiums
   Perception of risk (economic slowdown, inflation, regulatory/tariff uncertainty) causes investors to be more cautious. Some think cap rates have peaked and may compress (i.e. decline) if risk subsides and demand remains stable. CBRE+1

How Owners Should Think About Cap Rates

Here are some principles for owners to use cap rates strategically, not just as a snapshot.

• Look beyond today’s cap rate → focus on NOI growth potential. If your hotel is underperforming ADR or occupancy vs peers, there’s value upside. Improving RevPAR, increasing direct bookings (to reduce OTA fees), optimizing pricing strategies, and controlling expenses can meaningfully shift your NOI.
  
  

• Beware of headline cap rates without context. Two hotels with the same cap rate might have very different risk profiles, deferred maintenance, CapEx obligations, or brand/franchise fees. Always adjust for those.
  
  

• Use valuation models including multiple scenarios (base case, upside, downside). For example, what happens to your value if operating costs rise 5% vs revenue rising only 2%?
  
  

• Operational levers that impact valuation:
  

  • Maximizing ADR in peak seasons
    

  • Improving occupancy in shoulder/off-peak via packages or flexible stay policies
    

  • Reducing fixed and variable costs (energy, renegotiating vendor contracts)
    

  • Direct bookings to improve flow-through (less commission to OTAs)
    

  • Maintaining or upgrading quality to reduce deferred CapEx, maintain RevPAR Index (comp set performance)
    
    

• Benchmark vs your peer set (same chain scale, geography, asset age). If your cap rate is higher than comparable assets, figure out if that’s justifiable (risk, condition, demand) or if there are improvements to be made.
  
  

Outlook: Where Cap Rates Might Go Next

Looking ahead to late 2025 and into 2026, here’s what seems likely:

• Cap rates may edge downward slightly if interest rates moderate, bond yields stabilize, and investor confidence improves. Some CBRE respondents already believe we may have passed the peak. CBRE
  
  

• NOI margins may continue under pressure as costs (insurance, labor, energy) remain elevated. Even with revenue growth, margin compression is a concern. CBRE+1
  
  

• Urban and gateway markets likely will remain more competitive, possibly leading to tighter cap rates (lower yields) versus riskier secondary or seasonal/resort markets.
  
  

• Hotels that invest in operational efficiency, direct booking growth, premium amenities may outperform in valuation and attract more favorable cap rate comparisons.
  
  

Conclusion

Cap rates in 2025 are not static. They reflect a balance of income (NOI), investor risk expectations, cost pressures, and broader macro conditions. For independent and boutique hotel owners, knowing where your hotel stands—and where it could stand—is key for making strategic decisions like refinancing, renovation, or sale.

If you’re considering refinancing, selling, or just want to understand how your hotel’s value is shifting, MHS can help you model and improve NOI growth and competitive positioning. Reach out for a consultation.