What Rate Cuts Won’t Fix in Hospitality
For the past several years, operating hotels has required resilience, discipline, and an unusual level of patience. Owners have navigated shutdowns, labor shortages, inflation, supply-chain disruption, rising insurance costs and higher interest rates – often simultaneously. But as welcome as further rate cuts may be, it is important to separate relief from resolution. Lower borrowing costs will not fix the structural pressures now shaping the hospitality sector.
Those advising on lending, restructuring, transactions, and real estate law need to understand what is, and is not, solved by monetary policy. The gap between the industry’s underlying performance and the assumptions used in many capital structures has widened, and the implications reach far beyond hotel operators.
Demand Flatlines Independent of Interest Rates
Rate cuts can lower debt service. They cannot generate guests. After a brief post-pandemic rebound in leisure travel, national demand has plateaued. Business travel has not returned to pre-2020 patterns, government travel remains smaller, and international visitation has softened.
RevPAR contracted year-over-year this summer, signaling the clearest break from the “recovery narrative.” CoStar/STR responded by cutting its 2025 outlook twice – lowering projections for demand, average daily rate, and RevPAR growth. Meanwhile, international arrivals declined by more than 3% year-over-year in July, with forecasts now projecting roughly 8% fewer overseas visitors in 2025 than originally expected.
For practitioners structuring financing, litigating valuation disputes, or advising owners on hold vs. sell decisions, the takeaway is simple: the demand story is flat, and cheaper debt does not change that.
Expense Floors Are Now Structural, Not Cyclical
The industry’s cost structure has been fundamentally reset. Unlike rates, these inputs do not trend back down.
Labor: Line-level wages that were once $8-$15 an hour now clear $18, and some jurisdictions are adopting or exploring $25/hour minimums in hospitality.
Insurance: Premiums are up 15-20% depending on region and tier – levels that industry analysts now classify as “structural resets.”
Property taxes: Municipal reassessments and budget gaps are pushing valuations higher.
Debt: Even with recent rate easing, many 2023-2025 maturities cannot clear DSCR without new equity or restructured terms.
Capex: Brand-mandated property improvement plans, many deferred during the pandemic, are now due – at far higher construction and labor costs.
These factors place sustained pressure on margins. Rate cuts reduce the cost of capital, but they do not reduce the cost of operations, making it risky for lenders or buyers to rely on pro formas builds on 2018-2019 cost assumptions.
Why Bid-Ask Spreads Are Widening, Not Narrowing
If the Federal Reserve were the missing ingredient for robust transactional activity, the public markets would tell a different story. Instead, lodging REITs are trading at long-running discounts to NAV. Some face activist pressure to liquidate, while others are pursuing full portfolio sales.
Yet in the private markets, many owners remain anchored by pre-COVID valuation levels. Buyers underwriting on today’s NOI and expense floors cannot support those numbers. The result is widening bid-ask spread and muted deal flow.
Lower borrowing costs may help buyers incrementally, but rate cuts alone will not bridge valuation gaps created by weaker fundamentals and rising expenses.
For lawyers and advisers, this reality is contributing to more complex negotiations, increased emphasis on capital stack realism, and greater demand for structured or phased exits.
Why Even Strong Operators Cannot ‘Wait Out’ This Cycle
Experienced owners can carry assets through volatility – but not indefinitely, and not without recalibrating expectations.
The cycle confronting hotels today is painfully familiar: lower cash flow leads to higher cap rates, which in turn depress values. As values fall, credit tightens, lenders require more cash to stay in deals, and owners are left with even less capacity to reinvest in the very demand drivers their properties need.
Time alone does not unwind that loop. Capital does. And capital deployed into a legacy cost structure or outdated performance assumptions risks being stranded.
For restructuring counsel, this means emphasizing realistic valuation benchmarks, educating clients on the limits of extend-and-pretend strategies, and proactively exploring consensual alternatives such as JV recapitalizations or structured exits.
Practical Implications for Legal and Financial Practitioners
Lenders: Portfolio reviews should incorporate revised expense floors and flat demand assumptions. Traditional DSCR thresholds may need recalibration, and earlier engagement with borrowers can preserve asset value and reduce litigation risk.
Borrowers: Owners must prepare for scenarios where additional capital is unavoidable. Those with strong balance sheets can use this moment to reposition; those without may need guidance on orderly sales or restructuring.
Transaction attorneys and real estate practitioners: Underwriting should begin with 2025 realities, not pre-pandemic nostalgia. Deal structures may increasingly involved seller financing, preferred equity, or earn-outs tied to performance rather than price.
Restructuring counsel: Expect a rise in negotiated transitions, note sales, and consensual handovers. Foreclosure remains a tool, but it is rarely the most efficient route in hospitality given brand, capex, and operational complexity.
Stewardship Over Sentiment
After more than two decades of operating mid-market hotels through multiple cycles, including the financial crisis and the pandemic, I remain confident about long-term prospects of the sector. Fresh capital deployed at appropriate basis levels will likely perform well in 2026 and 2027.
But optimism must be matched with realism. Rate cuts relieve pressure, they do not rewrite economics. For owners, advisers, lenders, and legal practitioners, understanding the difference between cyclical relief and structural reset is the key to navigating this moment.
The industry does not need miracles. It needs clarity, disciplined decision-making, and a willingness to accept the world as it is and not as we hope it to be.
