Renovation Costs Are the Real Reason Hotel Deals Are Stalling

Written by:

Rudi Davis

Date:

09 Dec 2025

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Across the hospitality sector, fewer hotel deals are getting done, and the reason is largely practical rather than macroeconomic. As the cost of bringing properties up to current brand standards continues to climb, renovation budgets are increasingly breaking the math on potential transactions. In many cases, the added capital required upfront makes deals harder to finance, more expensive to underwrite, and ultimately less attractive to both buyers and lenders.

That dynamic is reshaping how deals are evaluated, according to Stephen Haase, Director of Capital Markets at Greysteel. Haase says rising brand-mandated renovation costs have become the main obstacle in hospitality transactions, forcing borrowers and lenders to step away from deals that would have made sense under more manageable upgrade requirements.

Refinancing Replaces Sales

Most hotels flagged under major brands are not owned by the brands themselves. They’re owned by independent operators who license the brand name through franchise or management agreements. That structure leaves owners responsible for funding renovations required to meet brand standards, particularly when a property changes hands. As those requirements grow more expensive, renovation costs increasingly sit at the center of the deal calculus.

Faced with the renovation costs that a sale would trigger for a new owner, many owners are reconsidering whether selling makes sense at all. Over the past six months, that reassessment has translated into a clear shift in strategy. Instead of selling to new buyers, many owners are opting to refinance and take on renovations themselves.

Haase notes that brand-mandated property improvement plans (PIPs) – the renovation requirements triggered by a sale – are typically far more demanding than those tied to a refinance. “Change-of-ownership PIPs tend to be a lot more burdensome,” Haase says. As a result, many owners are opting for cash-in refinancings, a structure in which the owner contributes additional cash at closing to help fund required renovations. In exchange, the refinance extends loan terms, aligns debt service with current performance, and avoids the more extensive renovation requirements that would accompany a sale.

The larger result is a meaningful shift in deal flow. Transactions that might once have come to market as sales are now staying with existing owners, limiting opportunities for new capital and reshaping activity across the hospitality investment landscape.

Lender Skepticism

Beyond the sheer size of renovation budgets, lenders are introducing a separate issue: confidence in the numbers themselves. Even when owners or buyers are willing to take on required upgrades, lenders are increasingly unwilling to underwrite renovation budgets they view as optimistic or incomplete. “Lenders really don’t believe in the cost estimates from some of these groups,” Haase says. “They don’t want to provide funding to a deal where there’s probably going to be cost overruns.”

That skepticism creates a feedback loop that plays out over time. Optimistic renovation budgets can help deals close, but when actual costs exceed projections, owners are forced to raise additional capital midstream to keep projects on track. Those overruns complicate ownership structures, strain relationships among partners, and increase execution risk. For lenders, these outcomes reinforce caution on future deals, leading to tighter underwriting standards across the board.

Renovation Costs Outpace Cash Flow

This renovation cost problem is especially difficult to solve because it cannot be addressed by lower interest rates or increased leverage. The fundamental issue is that the cost to update aging hotels to current brand standards is often too high compared to the revenue potential of many properties.

That gap is most pronounced across the bulk of the branded hotel market. Haase notes that economy, midscale, and upscale hotels – which account for most hotel transactions – have seen performance pull back across markets, limiting their ability to absorb large renovation budgets. By contrast, luxury properties operate in a separate tier, where high-income travelers continue to spend more each year, allowing those assets to better support significant capital investment.

The implication is clear: the properties that are most in need of renovation capital often have the weakest cash flow, making it nearly impossible to support debt service on renovation loans.

Adapting to the New Reality

While Haase does not offer a single solution, he says the market is adjusting in practical ways. Owners are leaning more heavily on refinancings to manage renovation requirements, and alternative lenders are stepping in where banks have pulled back. These lenders are more willing to finance renovation-heavy deals, but they do so by charging higher rates, requiring more equity, and structuring loans to account for the risk of cost overruns and execution delays.

He notes that debt funds – non-bank lenders that deploy investor capital rather than deposits – have been an important source of financing, particularly in the past six months, as banks have grown more conservative. “These alternative lenders are getting pretty aggressive on underwriting in markets that are still showing signs of growth,” Haase says.

Whether alternative lenders can fully replace traditional banks for renovation-heavy deals remains uncertain. What is clear, according to Haase, is that renovation costs – not interest rates – will continue to be the primary constraint on hotel transaction volume. As long as brand requirements remain misaligned with property-level cash flow, many deals will struggle to move forward, leaving the market in a holding pattern until brand demands, renovation budgets, and lender confidence come back into better balance.