I spent 10 years on the buy side at Stockbridge Capital, the last five as Director of Research. We closed more than $2B in commercial real estate. Hospitality was not a core focus, but I sat on enough hotel deals (and watched enough of them reprice mid-contract over a franchise agreement clause or a missed PIP) to know that hotels are the one CRE asset class where you are buying a business, not a lease. Every other sector trades on rent and credit. Hotels trade on the daily judgment of a general manager and the revenue-management system behind them.
That is why hotel cap rates behave differently from every other sector. The cap rate is the market’s price for operating risk, and the buyers who win deals are the ones who can read a full franchise agreement, reconcile T-36 against STR, and underwrite the PIP that the seller’s broker quietly left out of the OM.
The only asset class where you’re buying a business
Every other commercial real estate asset is a lease. A hotel is a P&L. You are not buying a stream of contractual rent. You are buying the right to operate 150 rooms that re-price every single night based on what the market will pay and how well your manager runs the building.
That distinction is the entire reason hotel cap rates behave differently from every other sector. Cap rates are a function of NOI stability. A Class A office building with long WALT on investment-grade tenants generates NOI you can underwrite with confidence: the cap rate reflects that confidence. A 150-key select-service hotel generates NOI that depends on RevPAR, which depends on occupancy, which depends on your STR comp set’s performance next Tuesday. Same NOI dollar, very different risk profile, very different cap rate.
Why hotel cap rates work differently
Start with the denominator problem. In multifamily, NOI is a function of rent roll plus expense ratio, and both sides of that equation move slowly. Leases reset annually. Operating expenses move with inflation. Year-over-year NOI swings are usually modest outside major market disruption.
In hotels, the revenue line is RevPAR (revenue per available room), which is ADR (average daily rate) multiplied by occupancy. Both variables move daily. Both compound. As a hypothetical, a hotel running 75% occupancy at a $180 ADR that drops to 65% occupancy at a $165 ADR loses about 21% of RevPAR (from $135 to about $107). Because hotel operating leverage is high (fixed costs such as labor, utilities, and franchise fees do not scale down with occupancy), a revenue drop of that size can become a much larger NOI drop.
That volatility is the reason institutional hotel cap rates trade wider than the stabilized equivalent in multifamily or industrial. You are being paid for operational risk, brand risk, and the reality that your NOI next year could be meaningfully different from this year even without any change in the real estate itself.
How do hotel cap rates differ by service tier?
Cap rates differ by tier, but we do not publish a numeric table here: the figures in circulation come from broker indications and surveys we could not source for this page. Use CBRE Hotels, HVS and JLL Hotels & Hospitality for current ranges, and use the table below for what moves a tier’s cap rate.
| Service tier | Typical characteristics | What pushes the cap rate wider |
|---|---|---|
| Full-service | F&B, meeting space, urban or airport | Large fixed cost base, group and convention volatility |
| Select-service | Limited F&B, branded, simple operations | Brand and PIP exposure |
| Limited-service | Room-only or breakfast-only | Thin margins, franchise risk in smaller markets |
| Resort | Destination, seasonal, amenity-rich | Seasonality, amenity CapEx, high FF&E load |
| Extended-stay | Longer length of stay, lower operating cost | Brand concentration |
A few patterns worth naming:
- Resort cap rates are highest because revenue is seasonal, CapEx is amenity-heavy (pools, spa, golf, F&B venues), and the FF&E reserve load is materially higher. A resort needs to reinvest a larger share of revenue than a select-service hotel.
- Extended-stay often prices tighter than its room count suggests because average length of stay (ALOS) is longer, which cuts labor cost per occupied room and compresses operating volatility. Institutional buyers reward that stability.
- Select-service is the institutional sweet spot. Big flags, proven unit economics, relatively simple to operate, defensible RevPAR. Most portfolio transactions at scale are select-service.
- Luxury urban full-service in gateway markets trades at the tight end: high-quality branded assets in New York, Miami, LA, San Francisco, and Chicago can price at the tight end of the market on the right story. They are treated less as hotels and more as trophy real estate with an operating overlay.
The brand question: flagged vs independent
Brand affiliation drives cap rate more than almost any other single factor after location.
Flagged hotels (meaning those operating under a Marriott, Hilton, Hyatt, IHG, or Choice brand) benefit from reservation systems, loyalty programs, and national marketing. They also carry franchise fees (royalty plus marketing and reservation contributions, set in the franchise agreement) and PIP obligations. Flagged select-service hotels often trade at tighter cap rates than equivalent independents in the same market because institutional buyers can underwrite RevPAR index against a known comp set.
Independent hotels (boutique, lifestyle, or unbranded) trade at a discount outside of specific markets where brand means less (high-end resorts, destination boutiques in Manhattan or Miami, unique product). The discount reflects higher customer acquisition cost, weaker reservation economics, and more concentrated operating risk in the GM and sales team.
Soft brands (Marriott Autograph, Hilton Curio, Hyatt Unbound) split the difference. They provide reservation and loyalty benefits without full brand-standard PIPs and fee load. Cap rates typically sit between flagged and independent equivalents.
When you see a hotel “going independent” in a sale process, ask why. Flag-to-independent conversion usually signals one of two things: the franchise agreement expired and the owner chose not to renew, or the PIP was too expensive to justify. Both are material underwriting inputs.
Franchise fees and management contracts: the NOI below the NOI
Two line items quietly determine what NOI actually flows to the buyer. Both are often understated in seller marketing materials.
Franchise fees on a branded hotel typically include:
- Royalty fee
- Marketing / program fee
- Reservation fee
- Frequent traveler program contribution
- Other fees (training, technology, credit card)
Each is a percentage defined in the franchise agreement, and together they come off the top before any hotel-level operating expense. Read the actual rates in the agreement; do not rely on rules of thumb.
Management contracts add another layer. If the hotel is operated by a third-party manager (Aimbridge, HEI, Crestline, Pyramid, HRI, and dozens of others), the management fee is a percentage of gross revenue, often plus an incentive fee on NOI above a threshold. Brand-managed hotels (Marriott International, Hilton running its own properties) carry their own fees plus centralized service allocations. The management agreement sets all of it.
FF&E reserve is the third line that buyers sometimes miss. Most franchise agreements require a percentage of gross revenue to go to an FF&E reserve. That money is restricted: it funds soft goods, case goods, and mid-cycle renovation. If the seller has been running with a lower reserve than the agreement requires, the buyer’s underwriting should normalize to the required level and accept the haircut to NOI.
Institutional buyers running comprehensive underwriting strip these three lines back to a defensible stabilized NOI, then apply the cap rate. Sellers quoting cap rates off gross operating profit (GOP) or off a reserve-light NOI are quoting a number that does not reflect what the buyer’s IC will fund.
RevPAR ramp and stabilization
New hotels and recently renovated hotels do not run at stabilized performance on day one. A ground-up hotel typically needs multiple years to reach stabilized RevPAR: the first year is ramp (opening discounting, brand database seeding, comp set penetration), the next approaches fair share, and stabilization follows.
Post-renovation hotels ramp faster because the customer base exists and the product improvement is the story. But there is still a ramp, and trailing 12-month RevPAR during renovation is not stabilized RevPAR.
Institutional buyers underwrite stabilized NOI (the number the hotel is expected to produce at mature performance) and discount back to current if the hotel is not there yet. A buyer using trailing RevPAR on a hotel mid-ramp is overpaying. A buyer using trailing RevPAR on a hotel just past stabilization in a growing market is underwriting the past, not the future.
The stabilization curve also interacts with cap rate: buyers will often accept a lower going-in cap (a year-one NOI basis) in exchange for higher projected stabilized cap rate, because they believe in the ramp. Conversely, trophy hotels that are fully stabilized and unlikely to grow trade at tight going-in caps because the NOI is what it is.
What institutional buyers underwrite differently
This is where hotel diligence diverges most sharply from every other CRE asset class.
STR comp set analysis. The STR report (now under CoStar) is the hotel industry’s proprietary benchmarking data. Every hotel operates against a defined comp set: a set of competing hotels in the same market and service tier. STR reports show the subject’s occupancy index, ADR index, and RevPAR index against that comp set. An index of 100 means fair share; 110 means outperforming; 90 means underperforming. Buyers underwrite whether current index is sustainable, whether there’s room to grow, or whether the hotel is overperforming and about to revert.
Brand change analysis. A flag conversion changes everything: customer mix, ADR positioning, fee load, PIP cost. Buyers evaluate whether the current brand is the highest and best use, or whether repositioning (Holiday Inn to Hampton Inn, Crowne Plaza to Marriott) unlocks value. This analysis requires reading the existing franchise agreement carefully: conversion clauses, termination fees, liquidated damages.
PIP and brand-required CapEx. The buyer’s first call to the franchisor is for a transfer PIP. That letter specifies every renovation required to maintain the flag under new ownership. The cost depends on the brand and the property. Buyers capitalize that into the deal, effectively lowering the purchase price by PIP cost or deducting it from underwritten NOI as near-term CapEx.
Historical CapEx vs FF&E reserve. The FF&E reserve history tells you whether the seller has been reinvesting. A hotel that collected its required reserves but spent far less has a depleted reserve account and an under-maintained asset. The physical condition report and engineering review need to reconcile against reserve history.
Management contract review. If the hotel is under a third-party or brand-managed contract, the contract term, termination rights, performance tests, and fee structure are critical. A hotel under a long management contract with restrictive termination is a fundamentally different asset than one that can be repositioned at close.
Common underwriting mistakes
Four mistakes show up repeatedly in hotel deals that reprice or fall out of contract:
1. Trailing RevPAR in growth markets. The T-12 understates forward NOI. The buyer underwrites to trailing, loses at BP during best-and-final, and watches another bidder who underwrote stabilized win.
2. Trailing RevPAR in softening markets. The T-12 overstates forward NOI. The buyer underwrites the trailing, wins the deal, and finds stabilized NOI well below closing underwriting.
3. Ignoring PIP CapEx. The seller’s broker leaves the PIP out of the OM. The buyer underwrites a clean NOI, puts the deal under contract, gets the transfer PIP letter from the franchisor in week two, and either eats an unplanned capital bill or reprices the deal and burns relationships.
4. No FF&E reserve in pro forma. In a hypothetical case, the seller has been running a 2% reserve against a 4% requirement. The buyer’s pro forma also uses 2%, matching the seller, which means buyer NOI is overstated by 2% of gross revenue. On a hotel doing $15M in top line, that’s $300K of NOI that doesn’t exist. At an 8% cap, that’s $3.75M of phantom value.
Every one of these errors traces back to a document in the data room that was read too quickly or not at all.
The sources institutional buyers rely on
- STR / CoStar: RevPAR, occupancy, ADR benchmarking; the hotel industry’s definitive benchmarking data; comp set construction and index reports
- HVS: valuation, feasibility, market studies; the long-standing go-to for hotel appraisal and market analytics
- CBRE Hotels: capital markets research, transaction comps, investor sentiment surveys
- JLL Hotels & Hospitality: global and US transaction data, capital markets intelligence, investor outlook reports
- Franchisor PIP schedules and brand standards manuals: non-public, obtained through franchisor relationship during diligence
- The deal room itself: franchise agreement, management contract, historical STR reports, CapEx history, FF&E reserve statements, PIP letters
The external data tells you where the market is. The deal room tells you what this specific asset is. Institutional hotel underwriting reconciles the two.
Where hotel diligence actually breaks down
Hotel deal rooms are document-dense in a way multifamily and office rarely are. A typical institutional hotel diligence package includes:
- Franchise agreement, with exhibits
- Any franchise amendments or side letters
- Management agreement
- Most recent PIP letter from franchisor
- STR comp set reports (monthly, trailing history)
- T-12, T-24, T-36 operating statements
- Departmental P&Ls (rooms, F&B, other operated)
- FF&E reserve reconciliation
- CapEx history
- Labor reports (FTEs by department, union contracts if applicable)
- Property condition assessment and engineering reports
- Environmental reports (Phase I at minimum)
- Guest satisfaction scores (GSS, NPS, J.D. Power if applicable)
That’s before you get to the standard real estate diligence: title, survey, zoning, tax, insurance, lease (ground lease if applicable).
Volume alone doesn’t make hotel diligence hard. The underwriting answers sit buried inside clauses of the franchise agreement, fee schedules in the management contract, and CapEx reconciliations across years of financial statements. One clause in the franchise agreement about brand-required renovations can move the deal by millions. One clause in the management contract about termination liquidated damages can make the deal unfinanceable.
Traditional hotel diligence is analysts reading franchise and management agreements while someone else reconciles T-36 against STR reports. Moraine is built for office, retail, and industrial underwriting and does not support hotel underwriting today, so use the framework above with your own hotel model. For the office, retail, and industrial deals it does support, Moraine reads the documents on upload and surfaces the specific clauses that move underwriting, with every number linked to its source.
The cap rate sources above are the starting point. The spread between what you pay and what you earn depends on reading the documents that sit underneath them.
Related reading
- What Is a Cap Rate? A Practical Guide
- NOI in Real Estate: How It’s Calculated and Where It Breaks
- Commercial Real Estate Underwriting: A Practical Guide
- Multifamily Cap Rates in 2026: Benchmarks by Market and Class
- Medical Office Building: The Investor Guide to MOB Underwriting, a lease-based specialty asset to contrast with an operating business like a hotel