Hospitality Lending Adjusts as Renovation Costs Pressure Hotel Owners

Written by:

Steve Marcinuk

Date:

05 Dec 2025

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The hospitality sector is navigating a challenging financing landscape as property owners face stricter brand standards and rising renovation costs. Although lending conditions have improved since the volatility earlier this year, hotel operators are increasingly choosing refinancing over sales to manage mandatory property upgrades and maintain compliance with brand requirements.

Stephen Haase, Director of Capital Markets at Greysteel, offers a detailed view into hospitality financing, drawing on his consulting background and five years specializing in debt and structured finance for hotels. His experience spans community banks, credit unions, institutional debt funds, and insurance companies, giving him insight into how various lenders are responding to current market pressures.

Boutique Approach in Capital Markets

Greysteel distinguishes itself from national firms by maintaining an entrepreneurial and flexible approach to deal-making. “We’re definitely much more of a boutique shop,” Haase says. “We pride ourselves on being more entrepreneurial in our approach, and that positions us to work with many clients on deals that fall outside the conventional scope of larger firms.”

This flexibility extends across geographies and deal structures, with Greysteel avoiding the rigid processes and internal handoffs common at larger organizations. The firm’s approach has proven valuable in emerging markets and transactions that require creative solutions beyond the standardized offerings of national competitors. This adaptability allows Greysteel to serve clients with unique financing needs that are often overlooked by lenders focused on high-volume, formulaic deals.

Regional Market Performance

Regional trends continue to shape the hospitality financing environment, with the Southeast remaining a strong performer. “In the hospitality side, there’s still a lot of good momentum in the Southeast,” Haase notes. “That’s been ongoing for the last five years, really since COVID.”

Greysteel’s team has also seen increased activity in the Midwest multifamily sector, driven by rent growth that supports favorable underwriting. However, the broader hotel market is facing challenges, particularly outside the luxury segment.

“Hotels across the country are in a challenging environment right now, outside of luxury properties, where the top 1% of guests have continued to spend more each year,” Haase says. “Most economy through upscale hotels have seen at least some pullback in performance regardless of location.” This slowdown is prompting owners to scrutinize their operating models and financing strategies more closely.

Owners Accept Higher Renovation Costs

A significant change has emerged in how hotel owners approach property improvements. After months of unrealistic expectations, many owners are now accepting the true costs of bringing properties up to current brand standards.

“Over the past six months, a lot of groups have had to accept reality about renovation costs,” Haase explains. This acceptance is prompting owners to weigh the decision to sell versus refinance.

Most choose to refinance and manage renovations themselves, rather than sell to new owners who would be subject to more stringent brand-mandated upgrades. “Marriott, Hilton, and other brands are more flexible on renovation costs when you’re refinancing with the existing ownership than if you were to sell and new owners come in,” Haase says.

The difference is largely due to Property Improvement Plans (PIPs). “The change of ownership PIP is usually much more burdensome than a refinance with a PIP included,” Haase notes. As a result, cash-in refinancing has become the preferred strategy, even when revenue growth is limited.

Stabilized Lending Conditions

The lending environment has stabilized since the spring, when market volatility made borrowing difficult. “Six months ago was right after the tariff announcement in April. It’s better now than the April lending environment,” Haase reports. “Over the past six months, the compression in spreads has been pretty meaningful since that blip during the tariff tantrum.”

Local and regional banks are still active for well-capitalized sponsors seeking moderate leverage of 60–65%. Debt funds are offering aggressive pricing, with some deals priced as low as mid-300s over SOFR for acquisitions that require modest renovations.

However, non-recourse debt remains difficult to obtain. CMBS loans are priced around 7% to 7.5% on an interest-only basis, prompting many borrowers to choose recourse options that are roughly 100 basis points cheaper.

Lender Activity by Deal Size

Deal size is a decisive factor in lender participation. For transactions in the $10–20 million range, local banks and credit unions remain active if properties have existing cash flow and leverage requests are under 65%.

Regional banks have become more conservative for larger deals. “Regional banks on deals above $20 to $25 million have pulled back,” Haase explains. “Their leverage is typically below 55% loan-to-cost on an acquisition, which keeps many sponsors from moving forward.”

This conservatism has opened the door for debt funds willing to underwrite the right hotel opportunities, especially in markets showing growth potential without a flood of new supply.

Relaxed Depository Requirements

One notable improvement in lending terms is the reduction of mandatory depository requirements. “Throughout most of 2024, banks still required some sort of depository relationship in hotel lending,” Haase recalls. “This year, that’s not been as big an issue on most deals we’ve taken to the banking community.”

Previously, deposit requirements of 5–10%, combined with conservative leverage, effectively reduced loan-to-value ratios to about 50%. This barrier made deals unworkable for many hotel owners, who often have significant assets but limited liquidity. The relaxation of these requirements has made it easier for owners to access financing.

Creative Capital Solutions from Portfolio Owners

A new trend is emerging among hotel portfolio owners who have established their own credit arms. These groups use their operational expertise to offer creative financing solutions while generating yield outside traditional equity investments.

“Many groups we work with have opened up credit arms as a way to get yield outside of putting out equity, since they’re not seeing acquisition opportunities they like,” Haase says.

These lenders can take more risk on leverage because they are underwriting like owners rather than lenders. Most of these groups do not want to take over assets but have the ability to do so more than traditional lenders. This is also prevalent in the preferred equity space as well.  

Renovation Costs as a Deal Barrier

Rising renovation costs remain the primary obstacle to completing hotel transactions. Major brands like Marriott, Hilton, and Hyatt have tightened their property standards, and the cost to comply often exceeds what borrowers or lenders consider reasonable.

“Brand standards are strict right now. The costs to bring properties up to those standards are significant,” Haase says. Many lenders are skeptical of borrower estimates, leading to tougher underwriting and more frequent deal failures.

When owners underestimate renovation costs, cost overruns can trigger capital calls, forcing both limited partners and general partners to contribute additional funds or risk losing their position in the ownership structure.

Outlook and Key Risks

Several factors will shape the hospitality lending environment in the months ahead. The potential appointment of a new Federal Reserve chair in May 2026 is a key point of uncertainty. “It’s likely going to be someone more aligned with the President’s preference for lower rates,” Haase predicts. However, if the bond market views the appointment as politically motivated, it could drive up long-term interest rates instead of bringing them down.

Data gaps are another concern. A recent government shutdown lasting over 40 days has delayed the release of key economic data, leaving investors and lenders with outdated information. “Because of the government shutdown, a lot of the data we’re supposed to be getting now is going to be very stale,” Haase says.

Conclusion

The hospitality financing market is adapting as owners, lenders, and brands confront new realities around property standards and renovation costs. Realistic cost assessments, flexible financing structures, and strong relationships with lenders who understand hotel operations are now essential for success. For boutique firms like Greysteel, the current environment presents opportunities to deliver value through adaptability and specialized expertise that larger competitors may be unable to match. As the market continues to adjust, hotel owners will need to remain nimble, balancing renovation demands with creative capital solutions to maintain competitiveness in a changing landscape.