There was a day not too long ago when hotels were viewed as quirky outliers within the investment landscape. They were too operationally complex, too cyclical and too dependent on fickle travel demand.
But over the past decade, something has shifted. Hotels have won over investors as they’ve come into their own. Their glow-up has allowed this asset class to evolve into a truly institutionalized investment, benchmarked and underwritten with the same rigor as other core property types.
The force behind that transformation? Capital.
“Hotels became institutionalized post-Great Financial Crisis when private equity recapitalized distressed assets and created a repeatable playbook through REIT exits,” said Ryan Bosch, principal at Arriba Capital. “Hotels stopped being niche and became core once data and scale allowed institutions to underwrite them like any other asset class.”
From Niche to Core
The notion that hotels could be treated with the same seriousness as other commercial real estate product types gained traction as investors witnessed the sector’s resilience despite more than a few obstacles. Think the Great Financial Crisis, pandemic, and today’s high-rate environment.
“The defining turning point was not one single event but the accumulation of cycle-tested evidence that hotels can withstand disruption and recover quickly,” said Adi Bhoopathy, managing partner and head of capital markets at Noble Investment Group. “Each cycle has reinforced that disciplined underwriting, strong operator alignment and hands-on asset management can deliver consistent returns.”
Fortunately, it’s more than just resilience moving the needle. Justin Knight, CEO of Apple Hospitality REIT, noted that improvements in quality, service, distribution, loyalty programs and reservation systems across chain scales have further bolstered investor confidence in the long-term value and consumer appeal of hotels.
“Availability of financing and extended growth cycles have facilitated ownership consolidation in both public and private investment vehicles,” he added. “These have brought broader recognition and appreciation for the investment yields hotels can provide, further elevating hotels as an institutional asset class.”
Fueling the Deals
Capital may have legitimized hotels as an institutional asset class, but creativity has kept this sector alive in recent years. After all, traditional banks tightened their purse strings post-pandemic. They kept them tight after interest rate hikes, forcing investors who wanted to stay active to think outside the box.
Their most common strategy? Tapping into alternative financing structures to keep projects moving.
“Private credit, mezzanine, preferred equity and tools like C-PACE have become the oxygen of hotel development,” Bosch added. “Without them, many projects would not get built.”
He pointed to a Hilton dual-brand project where bank lending capped leverage at 65 percent. By layering in private credit and PACE, the deal reached 80 percent, which was enough to preserve equity and keep the sponsor’s pipeline intact.
“It was the difference between shelved and shovel-ready,” he continued.
Carlos Rodriguez Sr., chairman and CEO of Driftwood Capital, has also had a slew of deals that wouldn’t have cleared without creative structuring. This included the execution of $35 million in mezz financing for a 1,841-room hotel in Dallas, as well as another $34.8 million for a hotel near Miami Airport. These transactions helped recapitalize the properties while delivering strong returns to investors.
“Alternative capital structures not only kept liquidity flowing during dislocated markets, but also opened pathways for sponsors to execute transactions that traditional banks would not have financed,” he said. “Private credit continues to serve as an important component of hotel capital structures, offering potential for equity-like returns with certain debt protections, subject to market conditions and individual transaction risks.”
For owners like Procaccianti Companies, the emergence of private credit has been just as critical.
“Without it, what was already a muted market would have been much worse,” added Rob Leven, the firm’s CIO.
Taken collectively, these alternative capital strategies have carried investors through a decade where the only precedent was the unprecedented. They provided confidence that deals can be structured and executed, even in tougher environments, while reinforcing the perception of hotels as institutional-quality investments – investments that are supported by a sophisticated capital stack rather than one-off bank loans.
Convergence with Other Asset Classes
The ability of hotels to blend seamlessly with other product types is another reason this asset class has secured its institutional-quality status. A quick glimpse around any major city or suburb will likely showcase a number of commercial functions side by side: hotel and entertainment, hotel and retail, hotel and medical.
Nowadays, it’s not uncommon to see hotel and…all of the above.
“Hotels are increasingly positioned at the heart of mixed-use ecosystems—integrating with branded residences, retail, office and flexible living,” Rodriguez Sr. said. “Many developers see hotels as a great amenity to be added to their mixed-use development because it brings more demand and higher pricing from clients for their other products like residences, office space or retail.”
Unlike static real estate, Rodriguez Sr. believes hospitality brings energy, experiential appeal and brand equity. This trifecta allows the product to elevate the value of surrounding uses, while potentially diversifying investor cash flows. That conviction led his company to launch Driftwood Lifestyle & Luxury last year. Seeded with 10 assets totaling about 1,650 keys, DLLX is designed to capture the convergence of design-led hotels, branded residences and wellness-driven programming – with multiple revenue streams under one roof.
Knight also sees the indispensable value hotels bring to today’s multi-functional developments.
“The addition of hotel rooms to a mixed-use development can help create consistent demand for restaurants and other retail outlets, as well as complimentary use of shared assets like parking,” he said. “Given the yields available for hotel investors and the way they complement other real estate assets, it is rare now to see a large-scale development project without a hotel component.”
Hotels can integrate so seamlessly within other environments that Bhoopathy sees a new trend emerging. One that blurs the lines between where multifamily ends and extended-stay hotels begin.
“The most compelling convergence in hospitality today is branded long-term accommodations,” he said. “What began as first-generation, extended-stay hotels has evolved into a purpose-built category that combines the efficiency of long-term extended-stay hotels with the resilience of multifamily.”
Bhoopathy noted this segment is projected to more than double in value by 2035, growing from roughly $60 billion to more than $140 billion.
“Yet supply continues to lag demand,” he continues.
Bhoopathy sees branded long-term accommodations as a hybrid of multifamily and hospitality. It’s a model he believes will play an increasingly important role in institutional strategies. That’s because affordability challenges, workforce mobility and shifting consumer preferences have reshaped how people live, work and stay. Branded long-term accommodations, meanwhile, can deliver durable occupancy, efficient operating structures and consistent cash flow that performs well across cycles.
This thinking has led to the creation of Noble’s Branded Long-Term Accommodations Platform, which the firm continues to expand through strategic partnerships and a pipeline of new nationwide developments and acquisitions.
What's Next
The past decade proved that hotels could mature into a true institutional asset class, but Chris Manley, president and CEO of Stonebridge Companies, believes the next will test how they continue to adapt as the cost of capital remains the industry’s largest driver.
“The capital markets will be the single biggest factor shaping hotel investment in the years ahead,” he said. “Investors remain disciplined, and until we see a more stable rate environment, many are waiting on the sidelines with cash ready to deploy.”
Jan Freitag, national director of hospitality analytics at CoStar Group, sees broader forces also shaping the sector’s future.
“Climate change will continue to determine how and where hotels get developed and—maybe more importantly—get insured or not,” he added. “In times when some areas have too much or too little water, it is too hot for too long and natural disasters can destroy the investment, lenders and investors will be ever-more vigilant to only pursue deals that are deemed resilient and somewhat safe from weather impact.”
Technology and consumer preferences will add further complexity. Whether it’s AI reshaping underwriting, branded long-term accommodations bridging multifamily and hospitality or hotels anchoring the next generation of mixed-use developments, investors will need to evolve their strategies alongside the product.
Despite all of this change, there is one constant that remains—and it’s not that everything will remain unprecedented (we hope). It’s the role of capital. This has been the industry’s driving force over the past 150 years, fueling the evolution of hotels from quaint little mom-and-pop inns to institutional investments. The next chapter will be no different. And capital will be there to define where, how and why hotels grow.
This article was originally published in the October edition of Hotel Management magazine. Subscribe here.