Hotel Cap Rate

Cap rates are the single most-quoted underwriting metric in hotel investment sales. They translate a property's operating performance into a yield that capital allocators can compare against Treasury rates, corporate bonds, and other commercial real estate categories. When a hotel broker quotes an 8.25 percent cap on a Holiday Inn Express in a Sun Belt secondary market, that single number encodes the buyer's view of cash flow stability, brand quality, PIP exposure, and submarket supply risk all at once.

The formula is straightforward. Stabilized NOI divided by purchase price equals the cap rate. NOI is revenue minus operating expenses, with capital expenditures, debt service, and income taxes excluded. The word stabilized matters. Buyers underwrite a forward NOI that assumes the property is operating at its sustainable run rate, not a depressed trailing twelve months caused by a renovation, a brand transition, or a one-time revenue disruption. That stabilized number is what gets divided into price.

Cap rates move inversely with price. When a buyer accepts a tighter cap rate, they are paying more dollars per dollar of NOI. A hotel producing $1.6 million of NOI sells for $20.0 million at an 8.0 percent cap, $21.3 million at 7.5 percent, and $18.8 million at 8.5 percent. Fifty basis points of cap rate compression on a typical select-service trade moves the price by roughly six percent. That is why owners and brokers track cap rate movement closely.

Cap rate bands vary by chain scale, market, and PIP status. As of Q1 2026, stabilized PIP-current select-service hotels in Sun Belt secondary markets price in the 7.50 to 8.50 percent range. Trophy full-service in primary metros prices 7.00 to 8.00 percent. Resort and lifestyle assets in supply-constrained leisure destinations price tighter, often 6.00 to 7.50 percent. Economy and tertiary-market assets price wider, sometimes 9.00 percent or more. The spread between segments has widened, not narrowed, since 2023.

The two variables that move cap rates the most are interest rates and perceived cash flow risk. When the 10-year Treasury moves 100 basis points, hotel cap rates eventually follow, though with a lag of two to four quarters. When buyers grow more confident in the durability of NOI, they accept lower cap rates. When uncertainty rises, around brand standards, PIP costs, F&B labor, or supply growth, buyers demand higher cap rates as compensation for that risk.

Cap rates are unlevered yields. They say nothing about the financing structure. A buyer paying an 8.0 percent cap with 60 percent debt at 7.0 percent interest is targeting a meaningfully different return than a cash buyer at the same cap rate. Sponsors translate cap rates into levered IRRs through their capital stack assumptions. The cap rate is the input. The IRR is the output.