Inside U.S. Hospitality

1.1Performance Overview

These figures tell a story of an industry that is growing, but barely. ADR continues to rise, yet it is growing well below the rate of inflation, which puts increasing pressure on operating margins. This dynamic will persist through at least the first half of 2026, with growth concentrated among higher-tier hotels and select upper-end scales. Economy and select-service segments, which represent the bulk of the U.S. hotel inventory, continue to face flat-to-negative RevPAR trends.

Several factors are expected to provide modest tailwinds in the second half of 2026. The FIFA World Cup, hosted across the United States, Canada, and Mexico, is forecast to contribute a 0.4% RevPAR lift nationally, with significantly higher impacts in host markets. Calendar composition is slightly more favorable than 2025. And international inbound travel, which declined meaningfully in 2025 due to geopolitical tensions and policy uncertainty, is projected to rebound by 3.7% in 2026, though levels will remain below 2019 comparables.

1.2Segment Performance Divergence

One of the defining characteristics of the current cycle is the widening gap between hotel segments. Luxury and upper upscale properties continue to benefit from strong ADR growth, driven by affluent leisure travelers and group demand in primary markets. RevPAR in the luxury segment averages between $210 and $450 nationally, with occupancy rates in the 70 to 75 percent range.

By contrast, the midscale and economy segments are experiencing sustained margin compression. These properties, which make up the largest share of the U.S. hotel supply and are disproportionately owned by independent and family operators, face a combination of limited pricing power, rising operating costs (particularly labor and insurance), and growing competition from short-term rental platforms. STR data shows that short-term rental demand increased 3.6% year over year in mid-2025, with ADR reaching 140% of 2019 levels, directly cannibalizing hotel demand in drive-to leisure and suburban markets.

1.3Demand Drivers and Headwinds

The demand picture for 2026 is mixed. On the positive side, corporate and group travel continues to recover, with Google searches for corporate travel increasing 6.4% year over year by late 2025. TSA throughput has stabilized at levels modestly above prior year, suggesting domestic air travel demand remains healthy. The World Cup represents a meaningful but concentrated demand catalyst.

Headwinds are equally significant. International inbound travel remains well below 2019 levels, weighed down by a strong dollar, geopolitical uncertainty, and shifting consumer sentiment. U.S. outbound travel continues to outpace inbound, creating a structural demand imbalance that is unlikely to resolve fully in 2026. Consumer credit stress is also emerging as a concern. Credit card delinquency rates have risen, particularly among lower-income consumers, which poses a risk to economy hotel demand. And the broader macroeconomic environment, characterized by GDP growth below the long-term average (CBRE estimates 1.6% for 2025 and 1.8% for 2026), persistent inflation, and labor market softening, limits the potential for a meaningful demand reacceleration.

2.1Delinquency and Distress Metrics

Hotel CMBS delinquency rates have been on an upward trajectory throughout 2025. The Trepp lodging delinquency rate rose 44 basis points in December 2025 alone, reaching 6.61% for the month, the largest single-month increase among all property types. By January 2026, the overall CMBS delinquency rate climbed to 7.47%, with the special servicing rate reaching 10.91%.

KBRA’s analysis of its rated CMBS universe tells a similar story. The lodging sector registered the largest increase in delinquency in December 2025, up 37 basis points. Of the $1.3 billion in CMBS loans newly added to distress in December, over 40% involved imminent or actual maturity default.

2.2The Refinancing Squeeze

The mechanics of the refinancing crisis are straightforward but severe. Approximately $23 billion in hotel CMBS debt was refinanced during the 2020 to 2022 period at interest rates between 3.0% and 4.5%. Those borrowers now confront refinancing rates in the 6.25% to 7.0% range, representing a roughly 40% increase in debt costs. For properties that have not materially grown their net operating income since the original financing, the math simply does not work.

Debt yield, defined as net operating income divided by loan amount, has become the binding constraint. Hotels need debt yields of 10 to 12 percent or higher in the current market to secure refinancing. Below 8% is considered extremely difficult; the 6 to 8 percent range is widely referred to as the danger zone. According to Matthews Real Estate’s 2026 hospitality outlook, 39% of hotels with low debt service coverage ratios are already struggling with these dynamics.

2.3The PIP Enforcement Wave

Compounding the refinancing pressure is the simultaneous enforcement of deferred Property Improvement Plans (PIPs). Major hotel brands, including Marriott, Hilton, IHG, and Wyndham, granted widespread PIP deferrals during and immediately after the COVID-19 pandemic. Those deferrals have now largely expired, and brands are enforcing compliance with increasing urgency.

A typical PIP for a 100-key select-service hotel runs between $1.5 million and $3.0 million, depending on the scope of work and the specific brand requirements. For owners who are simultaneously facing refinancing at higher rates and operating in a flat RevPAR environment, the capital requirement for PIP compliance can be the tipping point that forces a disposition.

This convergence of refinancing stress and PIP enforcement is producing a growing volume of distressed or motivated sellers. With approximately 117,000 hotels in the United States, estimates suggest that 5% of total inventory could come to market, equivalent to nearly 5,850 potential listings, a level that would meaningfully expand available supply for acquirers.

2.4Market Transaction Dynamics

Despite the theoretical increase in available inventory, transaction volume has been constrained by the bid-ask spread between buyers and sellers. Hotel sector transaction volume totaled just over $5 billion through Q2 2025, a decline from the $6 billion recorded in the same period of 2024. Trophy assets in primary markets continue to attract institutional capital, but the majority of mid-market and select-service transactions are being slowed or stalled by feasibility gaps.

The expectation across the industry is that transaction volume will eventually increase, driven predominantly by distressed sales as over-leveraged owners are forced to trade. For opportunistic and value-oriented acquirers, this environment presents compelling entry points, particularly in the branded select-service and limited-service segments where the discount to replacement cost is most pronounced.

3.1National Cost Benchmarks by Brand Tier

3.2Cost Stack Breakdown

A typical 110-key limited-service hotel in a suburban Sun Belt market, the prototype most commonly associated with brands like Hampton Inn or Holiday Inn Express, breaks down approximately as follows:

3.3Regional Cost Variance

Construction costs vary substantially by geography. Hard costs alone can swing 20 to 40 percent depending on labor markets, permitting timelines, material logistics, and prevailing wage requirements. Land costs introduce even greater variability.

3.4Brand-Specific Development Costs

Each hotel brand maintains a distinct prototype with different FF&E specifications, public area requirements, and amenity packages. These differences drive materially different development budgets for the same key count.

The cost spread between a Tru by Hilton at the low end ($11 to $14 million total) and a Residence Inn at the high end ($22 to $29 million total) is nearly twofold for the same 110-key property. This disparity makes the build-versus-buy calculus dramatically different depending on brand positioning. When a distressed Residence Inn can be acquired at $60,000 per key, representing an all-in cost of approximately $6.6 million for a 110-key property, that purchase price sits at roughly 75% below replacement cost.

4.1Side-by-Side Comparison

4.2Conditions Favoring New Construction

New construction becomes the more compelling option under a specific and relatively narrow set of circumstances. First, when a submarket has demonstrable unmet demand but no existing hotel to acquire. This is most commonly found near new demand generators such as data centers, advanced manufacturing facilities, military expansions, or university campuses in markets that have not yet attracted hotel development.

Second, when franchise territory protection is a priority. In markets where a high-performing flag such as Hampton or Holiday Inn Express does not yet have representation, the first mover secures an exclusive territory that may take years to replicate through acquisition.

Third, in low-cost-to-build states, specifically Texas, Tennessee, North Carolina, and Georgia, where all-in construction costs of $145,000 to $200,000 per key can approach distressed acquisition costs in certain submarkets. And fourth, in portfolio scale situations where a developer is constructing multiple prototype hotels simultaneously and can negotiate volume discounts on FF&E, construction, and franchise terms.

4.3Conditions Favoring Acquisition

For most markets and most investment profiles, the acquisition of existing PIP-distressed properties offers materially superior risk-adjusted returns compared to ground-up development in the current cycle.

A deep discount to replacement cost, typically 40 to 60 percent below new construction, provides a significant margin of safety that insulates against downside scenarios. The acquired property generates revenue from the first day of ownership, even during renovation, whereas new construction produces zero revenue for two to three years. Historical operating data, STR performance reports, and market penetration indices provide real, verified evidence of demand.

Favorable financing further tips the balance. SBA 504 and 7(a) loans are available for hotel acquisitions with equity requirements of 25 to 30 percent in the current lending environment, compared to the 35 to 45 percent equity typically required for new construction.

In Perseus’s assessment, the 2026 to 2028 period represents an unusual and time-limited window during which the acquisition of existing properties will deliver superior risk-adjusted outcomes relative to new development for the majority of target markets.

5.1Financing Options Comparison

5.2SBA 504: The Workhorse for Hotel Acquisitions

The SBA 504 loan program is the most commonly used financing vehicle for branded hotel acquisitions. Its structure allows for high leverage, fixed long-term rates on the second mortgage component, and long amortization periods that keep debt service manageable relative to hotel cash flows.

The program consists of three components: a participating bank provides the first mortgage (50% of project cost), a Certified Development Company (CDC) backed by the SBA provides a second mortgage (up to 20–25%), and the borrower contributes equity of 25 to 30%. In the current lending environment, the historically advertised 10 to 15% down payment is rarely achievable for hospitality assets. Through the SBA 504 Green program, up to $16.5 million can be financed across multiple projects.

5.3The Bridge-to-Permanent Strategy

For PIP-distressed acquisitions, the optimal financing approach is a two-step process. The acquirer closes with a bridge loan that provides speed and flexibility, completes the PIP renovation, stabilizes operations, and then refinances into permanent SBA 504 or conventional debt at a higher appraised value.

Step 1 — Bridge Acquisition: Close with a 12 to 24 month bridge loan at 65 to 75% LTV, priced at SOFR plus 400 to 600 basis points, with interest-only payments. Key advantages are speed (closings in 7 to 30 days) and the ability to acquire properties that do not yet qualify for permanent financing.

Step 2 — PIP Execution: Draw on the renovation budget to complete brand-mandated improvements. The property continues to generate reduced but positive cash flow during renovation.

Step 3 — Permanent Refinance: Once stabilized (6 to 18 months post-renovation), refinance into SBA 504 or conventional CRE financing at the new, higher appraised value. Increased NOI supports stronger DSCR and better terms.

5.4How Lenders Underwrite Hotel Deals

Hospitality is classified as a specialized, higher-risk property type by virtually all lending institutions. Lenders apply more conservative underwriting relative to multifamily or industrial assets.

Debt Service Coverage Ratio (DSCR): Hotels require a minimum of 1.25x to 1.40x coverage, compared to 1.20x for multifamily. Lenders stress-test at 200 to 300 basis points above current rates.

Debt Yield: Hotels need 10 to 12 percent or higher. Below 8% is very difficult; the 6 to 8 percent range represents significant refinancing risk.

Loan-to-Value (LTV): Senior lenders cap hotel LTV at 60 to 65%. With SBA enhancement, total leverage can reach 70 to 75% in the current environment.

RevPAR Index: Lenders benchmark against the competitive set. An index above 100 is a strong signal; below 90 faces scrutiny.

Sponsor Track Record: Hotel operating experience is considered paramount. Lenders evaluate prior ownership history and the team’s ability to execute PIPs.

5.5The Private Credit Landscape

Private credit has emerged as the dominant capital source for hospitality transactions as traditional banks pull back. This shift is structural, not cyclical. Banks currently hold approximately 50% of all outstanding CRE debt but are actively reducing exposure to hospitality.

Peachtree Group, the leading hospitality-focused private credit platform, deployed $3.0 billion in credit transactions in 2025, an 86.8% increase over 2024. The firm was ranked the seventh-largest investor-driven CRE lender by the Mortgage Bankers Association. With $1.5 trillion in CRE maturities coming due by 2028, private credit platforms will continue filling the void left by traditional lenders.

5.6The Risks Building Within Private Credit

While private credit has stepped in to fill the void left by retreating banks, several structural vulnerabilities warrant careful monitoring.

First, the sheer velocity of deployment raises concentration risk. Peachtree Group nearly doubled its lending volume in a single year. When capital is deployed at this pace into a sector experiencing elevated distress, the quality of underwriting inevitably comes under pressure.

Second, the opacity of private credit creates systemic blind spots. Unlike CMBS, where loan performance is tracked monthly, private credit portfolios are not subject to the same public reporting. The Federal Reserve has flagged this opacity as a potential systemic concern.

Third, the maturity profile of private credit hotel loans is heavily concentrated in 2027 and 2028. Much of the bridge lending deployed in 2025–2026 carries 24 to 36 month terms, creating a potential refinancing wave.

Fourth, leverage-on-leverage dynamics mean even moderate credit deterioration can be amplified at the fund level.

Fifth, competitive pressure is driving some lenders to accept lower debt yields, higher LTV ratios, and thinner covenant packages. This race for deployment volume creates tail risk the industry has not yet confronted.

Perseus intends to publish a separate research paper focused entirely on the private credit landscape in commercial real estate.

6.1Scale and Economic Impact

The concentration of ownership is particularly striking in certain states. In Texas, for example, more than 89% of hotels are owned by AAHOA members. This level of market dominance means that in most U.S. markets, the buyer, seller, or operator on the other side of a hospitality transaction is likely to be an AAHOA member.

6.2The Operating Model

The Indian-American hotel ownership model is built on principles of extreme operational efficiency, family labor, community-based financing, and disciplined reinvestment.

The foundational model involves the owner and their immediate family living on-site or in close proximity. Family members handle front desk operations, housekeeping, maintenance, laundry, and management. Labor cost reductions of 30 to 50 percent are common.

Additional advantages include elimination of third-party management fees (3–5% of revenue), zero housing costs for the family, and 24/7 availability improving guest satisfaction.

Community-based financing through trust-based lending networks enabled new immigrants to acquire first properties. While modern operators use conventional financing, the ethos persists through family loans and joint ventures. AAHOA’s 2025 launch of AAHOALending.com is a formalized extension of this tradition.

6.3The Property Flipping Model

A distinctive strategy among Indian-American operators is the disciplined cycle of acquiring distressed assets, renovating through sweat equity, stabilizing operations, and selling or refinancing to trade up.

Step 1: Target properties others avoid—deferred maintenance, poor management, declining occupancy. The community benchmark is 3 to 4 times cash flow (a motel generating $100K/year acquired for $300K–$400K).

Step 2: Family members perform renovation work. Contractor costs minimized through community networks and bulk purchasing.

Step 3: Operate under the lean family model for 3 to 5 years, driving up occupancy and ADR.

Step 4: The stabilized property is worth 2 to 3 times the original price. Sell and trade up, or cash-out refinance.

Step 5: Over 2 to 3 cycles, a family can progress from a single budget motel to a portfolio of branded hotels worth $20M to $50M+.

6.4The Generational Evolution and Succession Gap

Today’s AAHOA landscape reflects a generational transition creating both challenges and opportunities. The first generation (1970s–1990s) built the ownership base through budget motels. The second generation (1990s–2010s) professionalized operations and scaled into branded properties. The third generation brings university educations and capital market sophistication.

However, a significant portion of the third generation is choosing careers outside hospitality entirely. DJ Rama, CEO of Auro Hotels, noted at the 2025 AAHOA Convention that the third generation wants to work in whatever industry appeals to them.

First-generation owners are now in their 60s to 80s, facing retirement and estate planning needs. Their properties frequently require PIP renovations they can no longer fund. Where no family member wants to assume the business, the need for recapitalization becomes pressing.

Mitch Patel, CEO of Vision Hospitality Group, framed it directly: there are ultimately only two outcomes—sell everything, or develop a strategic succession plan.

6.5The AAHOA Trade-Up Lifecycle

Each phase of the trade-up model has distinct characteristics and creates specific moments where an institutional capital partner adds meaningful value.

Phase 3 (Years 10–20, Portfolio Scale): With $4M–$5M+ in accumulated equity, the operator acquires 2 to 4 hotels simultaneously. This is the critical inflection point where the family model encounters its structural ceiling. The owner cannot be physically present at every property. Institutional financing demands reporting and governance the operator hasn’t previously needed.

This inflection is precisely the point at which an institutional capital partner provides the most value: growth capital, institutional financing access, centralized reporting, and back-office support.

Gap 1The PIP Capital Gap

Brands deferred PIPs during and immediately after COVID. Those deferrals are now expiring, and compliance enforcement has resumed. A typical PIP for a 100-key select-service hotel requires $1.5M to $3.0M. Many operators are capital-constrained with wealth concentrated in real estate, not liquid reserves.

The capital solution involves structured joint ventures, preferred equity, or co-investment where the existing owner retains a stake and continues managing, preserving their lean cost structure, while the capital partner funds the renovation.

Gap 2The Succession and Estate Gap

First-generation owners built businesses over 30 to 50 years. Many now confront retirement, health, and estate planning realities. Where no family member is willing or able to take over, the need for a clean exit or recapitalization is acute.

Solutions include clean acquisition at fair market value with a respectful closing process, or partial buyout structures where the acquiring party takes majority ownership while a family member retains a minority stake.

Gap 3The Scale and Multi-Property Management Gap

The family-operated model delivers extraordinary returns at 1 to 3 properties. Scaling beyond that creates a management bandwidth problem. Hiring a third-party management company erodes the cost advantage that is the foundation of the model.

A capital partner can provide operational infrastructure: shared procurement platforms, centralized financial reporting, revenue management technology, and group insurance programs, allowing operators to scale from 3 properties to 10 or more.

Gap 4The Geography and Brand Tier Gap

AAHOA ownership concentration is deepest in economy and limited-service segments. Several niches are underserved: emerging submarkets around data centers and manufacturing reshoring, upper-midscale flags requiring higher capital thresholds ($170K–$265K per key for new builds), and certain tertiary markets with thinner operator networks.

These underserved niches represent opportunities for acquisition and development in the white space between established AAHOA concentrations.

Gap 5The Institutional Capital Access Gap

AAHOA’s 2025 launch of AAHOALending.com signals that capital access remains a top concern. Many single-property owners rely on a single bank relationship and lack access to institutional capital: CMBS, private credit platforms, insurance company debt, CPACE, mezzanine structures.

A capital partner with pre-established relationships across lending platforms can source creative financing solutions the average owner-operator cannot access independently.

7.1Partnership Structures

The following summarizes the principal partnership structures that address these gaps. The guiding principle is to preserve the operator’s incentive alignment and operational involvement. Displacing a capable operator is the worst outcome; empowering one with capital and institutional support is the best.

8.1The Distress Cycle Is Maturing, Not Ending

While some industry observers have begun to discuss a normalization of CMBS stress, the data suggests that the peak has not yet passed. Trepp’s research director has indicated that 2026 will likely be the peak year for CMBS distress, with normalization beginning in 2027. The $875 billion in CRE loans maturing in 2026, combined with ongoing PIP enforcement, means the pipeline of motivated sellers will remain elevated through at least late 2027.

8.2Private Credit Will Continue to Fill the Void

The structural shift from bank lending to private credit is not temporary. Banks are reducing CRE exposure as a matter of portfolio strategy and regulatory compliance. Private credit platforms are positioning themselves as permanent replacements. Borrowers who can navigate the private credit landscape will access flexible, creative structures, while those dependent on traditional banks will find options increasingly limited.

8.3The Generational Transition Will Accelerate

The AAHOA succession gap is not a future concern; it is a current reality that will intensify over the next 5 to 10 years. As first-generation owners age and third-generation members pursue careers outside hospitality, the number of properties needing new ownership, recapitalization, or professional management partnership will grow.

8.4Supply Discipline Creates Long-Term Value

The elevated cost of construction and financing has suppressed new hotel development well below pre-pandemic norms. HVS forecasts supply growth of approximately 1.0 to 1.2 percent in 2026, compared to the long-term average above 2 percent. This supply discipline is a powerful tailwind for existing asset owners and acquirers.

8.5The Opportunity Window

The convergence of elevated distress, suppressed construction, generational transition, and abundant private credit creates an unusual window of opportunity. This window will not remain open indefinitely. As interest rates moderate, distressed inventory is absorbed, and new supply ramps, conditions favoring disciplined acquirers will normalize.

The investors, operators, and capital partners best positioned to benefit combine deep industry knowledge, strong lender relationships, operational credibility within the AAHOA community, and the patience to execute a multi-year strategy.