Hospitality Underwriting Amid ADR and RevPAR Volatility: Building a Defensible Case

Four Seasons Hotel, Denver

Introduction

In the U.S. hotel industry, revenue volatility has become a defining challenge for lenders and investors. The COVID-19 pandemic underscored how dramatically Average Daily Rate (ADR) and Revenue per Available Room (RevPAR) can swing, with 2020 seeing RevPAR collapse by nearly 50% year-over-year – an unprecedented drop. Even outside of such extreme events, hotels experience cyclical and seasonal fluctuations in occupancy and rates that far exceed those in other real estate sectors. As we move through the latter half of the 2020s, economic uncertainty, shifting travel patterns, and uneven market recoveries are all contributing to ADR/RevPAR volatility. This volatility carries major implications for underwriting hotel loans. Lenders must build cases that account for wide-ranging scenarios and “stress-test” cash flows to ensure debt can be serviced even in downturns.

This post provides a detailed look at hospitality underwriting with a focus on ADR and RevPAR volatility. We will concentrate on U.S. hotel markets – especially Sunbelt and Northeast cities – and outline how key metrics are used in underwriting. We’ll examine historical patterns of ADR/RevPAR swings using internal MMCG data (in lieu of external sources), and explore hypothetical cases under multiple stress scenarios. We also discuss how segmented demand analysis (transient vs. group vs. business travel) can strengthen cash flow projections. Recent trends like rebounding leisure travel, a construction slowdown, high interest rates, and market bifurcation by hotel class (luxury vs. economy) will be analyzed in the context of underwriting. Finally, we highlight best practices for building a defensible underwriting case for hotel assets amid ongoing economic and travel uncertainty.

Key Metrics in Hotel Underwriting

Successful hotel underwriting starts with a solid grasp of the core performance and credit metrics. Below are key metrics, along with definitions and formulas, that lenders and investors use when evaluating hotel deals:

• Occupancy Rate (%) – The percentage of available rooms that are actually sold (occupied) over a given period. It is calculated as: Occupancy = (Rooms Sold / Rooms Available) × 100. For example, if a 200-room hotel sells 140 rooms on average per night, its occupancy is 70%. Occupancy reflects demand volume and is a critical driver of revenue.

• Average Daily Rate (ADR) – The average room revenue earned per sold room, indicating the average price guests pay. It is calculated as total room revenue divided by the number of rooms sold. In formula form: ADR = Total Room Revenue / Rooms Sold. For instance, if a hotel generates $15,000 in room revenue by selling 125 rooms in one night, its ADR is $120. ADR captures pricing power and rate strategy effectiveness.

• Revenue per Available Room (RevPAR) – The most comprehensive top-line performance metric, measuring revenue generated per available room (whether occupied or not). RevPAR can be calculated in two equivalent ways: ADR multiplied by the occupancy rate, or total room revenue divided by total available room-nights. For example, if that same hotel has 150 rooms and sold 125 (occupancy ~83%) at $120 ADR, its RevPAR would be $100 ($15,000/150). RevPAR incorporates both pricing and occupancy, making it the industry’s gold-standard indicator of overall room revenue performance.

• Net Operating Income (NOI) – The hotel’s operating profit before debt service, calculated as total revenues minus operating expenses. This is the cash flow that is available to pay the mortgage. Because hotels have high operating costs (labor, utilities, franchise fees, etc.), NOI is typically a fraction of total revenue (often 25–35% for full-service hotels, higher for limited-service).

• Debt Service Coverage Ratio (DSCR) – A crucial underwriting ratio that measures the cushion between cash flow and debt obligations. DSCR = Net Operating Income / Total Debt Service. For example, a hotel with $1.25 million annual NOI and $1.0 million in annual loan payments has a DSCR of 1.25×. Lenders generally require a minimum DSCR (e.g. 1.25 or higher) to ensure the hotel’s cash flow comfortably covers loan payments. A DSCR below 1.0 indicates insufficient cash flow to cover debt service – a red flag for default risk.

• Loan-to-Value (LTV) Ratio – Though not mentioned explicitly in the prompt, LTV is often considered: the loan amount divided by the appraised property value. In volatile sectors like hotels, lenders may advance lower LTVs to provide a margin of safety (e.g. 55-65% LTV instead of the 70%+ common in stabilized assets), knowing values can swing with performance.

• Debt Yield – Another credit metric (increasingly used by lenders post-2020) defined as NOI divided by the loan amount. It represents the return on the loan for the lender. For instance, a $10 million loan on a hotel generating $1.3 million NOI has a debt yield of 13%. Lenders may require a minimum debt yield (e.g. 10-12%) to safeguard against income volatility. This metric is independent of interest rates and focuses purely on cash flow relative to debt size.

Understanding these metrics and their interplay is fundamental. ADR and RevPAR tell us about top-line strength; occupancy provides insight into demand levels; NOI translates revenue and costs into profit; and DSCR, LTV, and debt yield inform us how much risk a lender is taking relative to the hotel’s income and value. In the sections that follow, we will use these metrics to analyze volatility and underwriting scenarios.

Historical ADR and RevPAR Volatility: Lessons from Past Cycles

Hotel performance is notoriously cyclical and sensitive to economic swings. Historical patterns from the MMCG database (reflecting industry data) show that ADR and RevPAR can experience wide year-to-year fluctuations, far greater than many other real estate asset classes. Lenders who lived through the last two decades have seen first-hand the magnitude of these swings:

• Early 2000s and 9/11: The 2001 recession and post-9/11 travel drop caused a sharp fall in occupancy. Many U.S. hotels saw RevPAR declines in the double digits that year, primarily driven by a collapse in demand (occupancy). ADR dipped as well, but moderately. In most cases, revenue recovered within a couple of years as travel rebounded, but the shock established that even a short disruption can significantly dent cash flows.

• The 2008–2009 Great Recession: This global financial crisis dealt a heavy blow to hotel performance. In 2009, U.S. RevPAR fell 16.7% – the worst annual decline on record up to that time. What made 2009 particularly painful was that both occupancy and ADR dropped substantially. Demand shrank as businesses and consumers cut travel, and hotels slashed rates to attract the few travelers on the market. A roughly 5 percentage-point drop in occupancy combined with an ADR decline over 8% led to the nearly 17% RevPAR contraction. For context, that is a nationwide average – many individual hotels fared worse, especially luxury and upper-upscale properties that saw rate cuts and low occupancies. According to industry analyses, about 10% of hotels experienced RevPAR declines greater than 30% in 2009. This period taught lenders that RevPAR can plummet in a recession and that declines driven by rate (ADR) compression are especially damaging to profitability. When ADR drops, each occupied room generates less revenue while many costs (like staffing a front desk or maintaining the property) remain fixed – a recipe for steep profit erosion.

• The 2020 Pandemic Crash: If 2009 was bad, 2020 was catastrophic for hotels. Widespread lockdowns and travel halts caused an unprecedented demand implosion. U.S. occupancy fell to about 44% for the year 2020 (down 33% from ~66% in 2019) and ADR dropped 21%. The combination resulted in RevPAR collapsing by 47.5% year-over-year, by far the worst decline ever recorded. Effectively, half of the revenue base disappeared in one year. Markets like New York and Boston saw occupancy drop to 20-30% at points in spring 2020, and even Sunbelt markets like Miami barely reached 50% occupancy that year. The shock was so severe that industry-wide revenues fell to levels not seen since the 1990s, and profit margins went to near-zero on average. While 2020 is an outlier scenario, it vividly demonstrates the extreme volatility inherent in hotel assets – something lenders must always keep in mind. Notably, economy hotels and extended-stay properties fared less badly (some maintained occupancies above 45-50% by housing essential workers or long-term guests), whereas full-service urban hotels were virtually empty for months.

• Recovery and Recent Years (2021–2023): The bounce-back from 2020 was also dramatic. Once vaccines rolled out and travel restrictions eased, leisure travel roared back. National RevPAR surpassed pre-pandemic nominal levels by 2022, driven initially by leisure-heavy markets. ADR in many resort destinations actually exceeded 2019 levels by mid-2021 as pent-up demand allowed hoteliers to charge premium rates. For example, resort cities in Florida and the Sunbelt saw double-digit ADR growth in 2021–2022. However, the recovery was uneven: Northeast gateway cities (New York, Boston, etc.) and any hotels reliant on international or corporate travel lagged in recovery. By 2023, most markets had recovered occupancy to near 2019 levels, and national ADR was roughly 7% above 2019 on average. This surge reflects how quickly rates can rebound – a welcome upside volatility for owners and lenders. But it came with new challenges, as inflation drove operating costs higher and certain segments (like business travel) remained below prior peaks.

• Current Conditions (2024–2025): As of late 2025, the post-pandemic boom has leveled off, and growth has turned anemic. RevPAR growth in 2024 cooled to essentially 0%, and 2025 year-to-date has even seen slight declines in real terms. Industry data through Q3 2025 shows occupancy down ~1%, ADR roughly flat to prior year, and RevPAR down ~1–2% nationally. In fact, through August 2025, RevPAR was up a mere 0.2% year-to-date, the weakest growth outside of a recessionary period. Weekday occupancies (a proxy for business travel) have been slipping for months, and hoteliers’ ability to keep raising rates has diminished. High occupancy is no longer translating to high ADR growth, especially in the luxury segment – for instance, U.S. luxury hotels in late 2025 are running ~75% occupancy but seeing only ~2% ADR growth year-over-year. This suggests pricing power is eroding even while demand volume holds, a sign of travelers’ price sensitivity and perhaps oversupply in certain markets. The industry’s RevPAR forecast for full-year 2025 has been revised down to a slight decline (-0.1%). In short, after the roller coaster of 2020–2022 (deep bust, rapid recovery), the hotel sector has downshifted into a slow-growth gear as pent-up leisure demand normalizes and economic headwinds (inflation, geopolitical uncertainty) weigh on travel.

The historical perspective above highlights why lenders must expect volatility. It is not a question of if another downturn will hit, but when and how severe. In mild recessions, nationwide RevPAR might only dip a few percent (the long-run average RevPAR change in past U.S. recessions was around -0.9%), but in severe crises it can drop 15%, 20%, even 50%. Individual markets and hotels can see even larger swings. Therefore, underwriting cases need to incorporate downside scenarios that mirror these historical shocks.

Stress-Testing Underwriting Cases with ADR/RevPAR Swings

Given the volatility in ADR and RevPAR, prudent underwriting for hotel loans involves stress-testing cash flow under multiple scenarios. Lenders build not just a single forecast, but a range of cases – typically at least a base case, an upside (or optimistic) case, and one or more downside cases (sometimes called stress or sensitivity cases). The goal is to see how the property’s ability to service debt holds up if things don’t go as planned, and to ensure there is a margin of safety in the loan. Below, we explore hypothetical underwriting scenarios using ADR and RevPAR assumptions:

• Base Case (Steady State): The base case reflects the most likely trajectory given current market conditions. For example, assume a 150-room hotel in Dallas currently has 70% occupancy and a $130 ADR, yielding a RevPAR of $91 (0.70 × $130). Annualizing that, the hotel sells about 38,300 room-nights (70% of 150 rooms * 365 days) and earns roughly $5.0 million in room revenue. If other income (F&B, etc.) adds $1.0M, total revenue is $6.0M. Assuming operating expenses at 75% of revenue (typical for a full-service hotel), NOI would be $1.5M. If this hotel’s annual debt service is $1.2M, the DSCR in the base case is 1.25× – meeting many lenders’ minimum requirement. In the base case, we might project modest growth (say +2% ADR and flat occupancy), resulting in RevPAR inching up to $93 next year. This scenario essentially assumes no major economic shocks – a stable environment with perhaps inflationary ADR growth and sustained demand.

• Downside Case (Moderate Recession): For a downside scenario, lenders often look at the impact of a moderate recession or demand slowdown on the hotel’s metrics. For instance, if a regional or national recession hit, our Dallas hotel might see business travel and group bookings pull back. Occupancy could drop, say, 10 percentage points (from 70% to 60%), as fewer rooms are filled. Furthermore, the hotel might discount rates to attract price-sensitive guests, pushing ADR down perhaps ~5-10%. Let’s assume ADR falls 5% from $130 to ~$123. In this moderate stress case, the new RevPAR would be 60% × $123 ≈ $74 – which is about an 18-20% decline from the base case RevPAR. Annual room revenue would fall to around $4.2M. With fixed costs, NOI could shrink disproportionately. If we assume expenses don’t decline in full proportion (say expenses now 80% of revenue due to some fixed costs), NOI might drop to $0.84M. Now the DSCR falls to roughly 0.7× ($0.84M NOI / $1.2M debt service), indicating the hotel would not cover its debt from operations in this scenario. Even if we assume more cost cutting (expenses 70% of revenue, a bit optimistic in a downturn), NOI maybe $1.26M and DSCR ~1.05× – barely breakeven. This moderate downturn case is reminiscent of conditions like 2008–09 for many markets, where RevPAR declines in the 15–25% range were common. Lenders want to know: can the asset survive a ~20% revenue drop? In our example, without additional equity or cash reserves, a prolonged ~20% RevPAR decline could push the property into a covenant default (DSCR < 1.0) or worse. This informs whether a higher initial DSCR or other mitigants are needed.

• Severe Stress Case: Lenders may also test a severe downside akin to the worst historical events. While not expected as a likely scenario, it’s a “what if” for tail-risk. For example, what if another shock similar to the pandemic or a deep recession occurs? We might model occupancy plummeting to 45% and ADR dropping 15%. In our hotel example, that would yield occupancy 45% of 150 rooms = 67.5 rooms/night, ADR ~$110, and RevPAR around $50. Room revenue would nearly halve to ~$2.7M annually. At that level, the hotel’s operations might barely break even (many hotels would operate at a loss with such low occupancy). DSCR would likely be well below 1.0 – clearly the loan would be in trouble unless the owner has substantial reserves. While no lender expects to see their borrower’s case hit this worst-case scenario, including it in analysis is useful. It highlights the magnitude of downside risk. For instance, knowing that a repeat of 2020 would send DSCR to near 0.5× might prompt a lender to require an interest reserve or a lower loan amount as protection.

• Upside Case: On the flip side, an upside scenario might consider that the hotel outperforms expectations – say the local market gets a boost (a new employer moves in, or a big event comes to town). Perhaps occupancy could rise a few points or ADR growth exceeds inflation for a time. In practice, lenders give less weight to upside in credit decisions (they prefer to underwrite to conservative outcomes), but investors may examine upside to judge potential return on equity. An upside for our Dallas hotel might be occupancy 75% and ADR $140 (RevPAR $105, ~15% above base case). That would yield higher NOI and a DSCR well above 1.5×, improving the borrower’s cushion and possibly the property value. However, lenders typically do not lend against upside – it’s more a sanity check that the business plan has potential. The focus for case-building remains on the base and downside cases, ensuring the deal is viable even if things go wrong.

In constructing these scenarios, lenders rely on both historical data and forward-looking forecasts. Historical volatility provides a guide: e.g., a particular market might have shown a 10% RevPAR decline in a mild recession and 40% in a severe one – that informs the stress percentages to apply. Our MMCG internal data might show, for example, that over the past 30 years the standard deviation of annual RevPAR change nationally is around 8-10%, with extreme outliers far above that (as seen in 2020). Using that, an underwriter can gauge that a “two standard deviation” bad year could easily be a 20% RevPAR drop or more, which should be tested.

Another approach is sensitivity analysis on individual inputs: e.g., “What if occupancy comes in 5 points lower than underwritten for the next three years?” or “What if ADR growth is zero instead of 3% annually?” Modern hotel cash flow models allow toggling these inputs to instantly see impact on DSCR, yield, and eventual loan repayment at maturity. Increasingly, credit committees want to see that a deal has been “run through the ringer” – that is, evaluated under tough conditions. In fact, many lenders now incorporate aggressive DSCR stress tests as a standard part of deal structuring. For example, a lender may require that even under a downside case (say -20% NOI), the DSCR would not fall below 1.0. If it would, the loan might be sized down until that condition is met. This kind of structured approach to volatility ensures there is some cushion before default.

To summarize, underwriting in hospitality today means embracing scenario analysis. Gone are the days of plugging in a single pro forma growth rate and calling it a day. Lenders will scrutinize the resilience of cash flows under multiple ADR/RevPAR trajectories. By building cases that include recessions or slowdowns (however uncomfortable those might be for borrower projections), lenders can make more informed decisions on loan sizing, pricing, and covenants. It is far better to bake in a downturn case at the outset than to be caught off guard when the next market dip hits.

Segmenting Demand: Transient, Group, and Business Mix in Cash Flow Modeling

Not all hotel revenue is created equal – its stability can depend on who the guest is and why they’re traveling. Two hotels with the same overall RevPAR may have very different risk profiles if one relies on volatile segments (say, discretionary leisure or conference attendees) while the other has a steadier base (e.g. government or corporate contract business). Segmented demand analysis allows underwriters to delve deeper into a hotel’s revenue streams and build more defensible cash flow models.

The hotel industry typically divides demand into segments such as transient, group, and sometimes contract (or business/government) segments:

• Transient refers to individual travelers booking rooms, which includes both leisure tourists and business travelers who are not part of a group block. Transient demand is often further segmented by channel or rate (e.g., retail, OTA bookings, loyalty member rates, etc.), but for underwriting, the key is that transient travelers choose hotels on a night-by-night basis. This segment is highly dynamic – pricing can be adjusted daily to influence transient demand. Leisure transient demand tends to be seasonal (peaking in vacation periods) and sensitive to economic factors (in downturns, families take fewer trips or seek cheaper accommodations). Corporate transient travel depends on business activity and budgets. A crucial insight from recent years is that leisure transient has been the engine of recovery since 2021, whereas business transient travel remains below pre-pandemic levels in many markets. For example, in New York and San Francisco, corporate travel budgets in 2025 are still constrained (down 8–12% quarter-over-quarter in late 2025) as companies cut non-essential trips. An underwriter examining a Manhattan hotel heavy on corporate transient would factor in a more sluggish recovery for that segment versus leisure. On the other hand, a resort hotel in Miami Beach mostly serving leisure transient guests might have a rosier near-term outlook but could be more exposed if consumer discretionary spending tightens (e.g. high airfares or economic woes could curtail vacation travel).

• Group demand consists of blocks of rooms booked together, typically for conferences, conventions, weddings, tour groups, or other events. Group business is usually defined as bookings of 10 or more rooms on a given night as part of one event or account. Group demand can be a double-edged sword: when it’s strong, it provides large chunks of occupancy often booked well in advance (which helps underwriting visibility). However, group bookings are highly sensitive to economic cycles and specific events. In recessions, conferences get canceled or scaled down; in pandemics, they vanish entirely for a time. In fact, as of 2025, group demand has been on a weakening trend – industry data shows group bookings declining for six consecutive months through August 2025. Economic uncertainty is causing companies and associations to trim event spending, directly hitting cities reliant on conventions. For underwriting, this means if a hotel (say, a big-box downtown hotel or a convention center adjacent property) relies 40%+ on group, the lender might apply a sharper stress to occupancy in a downturn scenario than they would for a hotel with minimal group business. Group cancellation risk is also important – hotels might have contracts with penalties, but a large event cancellation (such as after 9/11 or during COVID) can still leave a huge gap in the calendar that’s hard to fill with transient on short notice. Lenders can ask for details on group booking pace, major events in the books, and the composition of group business (e.g., is it mostly stable segments like government groups or volatile ones like tech company off-sites?).

• Contract or Negotiated segments (often considered part of transient, but worth noting separately) include business that is secured by contract for a set period/rate. A common example is airline crew contracts – an airline might contract 20 rooms nightly at a fixed rate for crew layovers. Similarly, government per diem travel can be thought of as semi-contract business, since it’s tied to a predetermined rate (the per diem) and a somewhat stable demand (government employees traveling). Extended-stay guests (stays of 7+ or 30+ nights) can also be seen as a segment; many extended-stay hotels cater to contract demand like construction crews, medical staff assignments, or relocating employees. These types of demand are highly valuable in underwriting because they represent a floor or baseline of occupancy that is less sensitive to short-term market swings. For instance, a hotel with 30% of its rooms guaranteed to an airline annually at a flat rate might weather a recession better – that 30% will likely stay occupied even if leisure travel dips. The trade-off is that contract rates are often lower than peak transient rates, but the stability can be worth it. Lenders often give credit for in-place contracts by modeling that portion of revenue separately (possibly with only mild downside), while applying heavier downside to the more volatile remainder of the business.

In practice, defensible cash flow models break down the revenue by segment to whatever extent data is available. Many borrowers provide a business mix breakdown (either by revenue or room nights) in their offering memorandum: e.g., “Hotel X’s mix is 50% leisure transient, 25% business transient, 20% group, 5% contract (airline).” An underwriter will use industry or internal data to assess how each segment might perform. For example, they might know that in a downturn, leisure transient for that chain scale tends to drop 10%, business transient 15%, and group 20%. They can then apply these drops to the respective portions of the mix to estimate an overall RevPAR decline in a recession scenario. This segmented approach is more nuanced than simply knocking, say, 15% off across the board – it recognizes that not all demand falls equally.

Segment analysis also matters for revenue management strategy. Hotels with a diverse demand base can shift tactics when one segment softens. If group business falls, a hotel might try to replace some of it with transient (maybe offering promotions on weekends to attract leisure). If business travel is weak mid-week, hotels might push harder on weekend packages or contract business. From an underwriting standpoint, a property that draws on multiple segments (and has a nimble management team) might be less risky than one that is a “one-trick pony.” For example, a pure convention hotel in Boston that lives and dies by a few big annual events has higher volatility – one lost convention can crater its Q3 performance. Compare that to a smaller Boston hotel that splits business between some tourists, some university visitors, some corporate – it may be more resilient.

The recent trend is for lenders and investors to ask deeper questions about segment mix. It’s no longer sufficient to assume all RevPAR dollars are the same. Granular data is more accessible now (through STR, Kalibri, and internal property systems) showing exactly how much revenue comes from each segment and at what cost. As an example, Kalibri Labs notes that decision-makers should analyze performance across specific sub-segments (AAA discount, OTA, corporate negotiated, etc.) because the composition of RevPAR tells a story about sustainability. If a hotel is getting a lot of its rooms via Online Travel Agencies at heavy discounts, that might signal it struggles to attract higher-rated business – a risk factor. Likewise, if most of a hotel’s “business travel” is actually a few local corporate accounts, one company downsizing could hit that hard.

In summary, segmented demand analysis allows lenders to build cash flow models that are more robust and credible. By explicitly modeling transient vs. group vs. contract demand, underwriters can tailor their assumptions to each segment’s risk profile. This results in projections that can be defended to credit committees and investors: for instance, one can articulate, “Our downside scenario assumes a 10% drop in leisure transient revenue and a 20% drop in group revenue, consistent with prior recession patterns for those segments, leading to an overall RevPAR decline of ~15%. However, the hotel’s fixed airline crew contract (5k room nights/year) provides a stable cushion even in that scenario.” This kind of detail strengthens the case for the loan because it demonstrates an understanding of where the risks truly lie in the revenue stream, rather than applying a blunt average decline.

Current Market Trends Shaping Underwriting Assumptions

Underwriting doesn’t happen in a vacuum – it takes into account the current market environment and trends. As of late 2025, several important trends are influencing how lenders and investors approach hospitality deals, especially in the Sunbelt and Northeast U.S. markets:

1. Demand Recovery and Shifts: Broadly, U.S. hotel demand is past the initial post-pandemic surge and entering a more mature phase of the recovery. Leisure travel remains a strong pillar – Americans embraced travel in 2021-2023 (“revenge travel”) and many continue to prioritize experiences. Sunbelt markets benefited enormously from this trend: for example, Miami’s hotels have enjoyed high occupancies (often 70-75%+) and elevated ADRs, even as growth has started to moderate. Miami’s RevPAR in 2025 is still growing (~+2.8% year-on-year) on top of very strong 2022–24 comps, reflecting enduring leisure demand. Phoenix and other warm-weather, outdoor-oriented markets also saw leisure demand drive relatively quick recoveries by 2022. However, some Sunbelt markets now face a plateau or slight dip. In Phoenix, for instance, RevPAR is down ~2.4% year-over-year in 2025, with occupancy slipping ~2-3 points. Part of this is due to tough comparisons (Phoenix hosted the Super Bowl in early 2023 which boosted that year’s performance), and part due to significant new supply in the past decade. We’ll discuss supply shortly, but the key demand point is that while leisure remains above pre-pandemic levels, it’s not growing as feverishly as it was, and consumer travel could soften if the economy cools (especially for middle-class segments facing inflation pressures).

On the business travel side, recovery has been incomplete. Major Northeast markets like New York and Boston, which rely on corporate and international demand, are now finally seeing solid improvements – with some caveats. New York City has rebounded strongly in 2023–2025: occupancy in NYC reached about 84% (highest in the nation) and ADR ~$328, resulting in RevPAR of ~$276 – up 6.3% year-over-year. New York’s revival has been driven by a surge in international tourists (as borders reopened) and a partial comeback of corporate travel and group events. That said, some of NYC’s demand has been aided by unique factors (e.g., city-funded block bookings for migrant housing in hotels, which boost occupancy) – not purely organic travel. Boston, another business-heavy market, saw 2025 occupancy around 73% and ADR ~$232, but essentially flat RevPAR growth (-0.8% YoY). Boston’s convention calendar and corporate travel are improving but not booming, keeping performance steady rather than spectacular. Dallas, a Sunbelt business hub, illustrates the interplay of leisure and corporate: Dallas enjoyed strong weekend/leisure occupancy over the past couple of years, but weekday/business demand has been uneven. In 2025 Dallas shows ~64% occupancy and $128 ADR, with RevPAR down ~1.2% YoY. This mild dip suggests a tempering of demand just as new hotels have opened in the Metroplex, plus perhaps some impact from reduced corporate travel budgets.

For underwriting, the implication is to calibrate demand growth assumptions carefully by market and segment. Sunbelt markets that led the recovery (Miami, Phoenix, Orlando, etc.) may face slower growth ahead as they were “first out of the gate” and have limited upside left without more business travel. Northeastern cities (New York, Boston, Washington D.C.) that lagged are now catching up, but could have more runway if conventions and international inbound travel continue to improve – yet they also face risks like remote work reducing business trips. The market bifurcation requires underwriters to use local data: for example, MMCG’s internal trends might show New York’s RevPAR volatility is high but trending up, while Phoenix’s is high and trending slightly down.

Furthermore, international travel trends matter: Many coastal city hotels depend on foreign visitors (who generally spend more per stay). Current forecasts project a ~9% drop in international arrivals to the U.S. in 2025, due to factors like visa backlogs and a strong dollar earlier in the year. Markets like New York, San Francisco, and Miami are particularly exposed to this. A lender might stress ADR in these markets if overseas high-spending tourists dwindle. Conversely, a strengthening of the euro or easing of visa issues could bump 2026 inbound travel, offering upside.

2. Limited New Supply – Construction Slowdown: A silver lining for hotel fundamentals is that new supply growth has markedly slowed. High construction costs, supply chain issues, labor shortages, and expensive financing have all put a damper on hotel development. Nationwide, new room supply is growing at only about 0.7% in 2025 (year-to-date) – well below the long-term average ~1.6% annual growth. In the major markets (Top 25), supply growth is even lower at ~0.4%. This contraction in the development pipeline is evident in absolute numbers: the number of hotel rooms under construction in the U.S. fell to around 138,000, a five-year low. Sunbelt cities that previously had booming pipelines, like Nashville, Austin, and to some extent Dallas/Phoenix, have seen many projects paused or canceled. For example, financing headwinds have cast doubt on whether all planned projects in markets like Miami, Phoenix, and Denver will actually materialize. This is good news for existing hotels – less new competition helps sustain occupancy and pricing power. Indeed, in constrained markets (think the Florida Keys or downtown Boston where building is tough), limited supply has allowed hotels to hold on to rate gains more effectively.

For underwriters, a slower supply pipeline can justify more optimistic occupancy or ADR stabilization assumptions, but with caution. One must consider local conditions: even if national supply is slow, certain submarkets have seen a lot of new rooms open in the past few years. Phoenix, Nashville, and Denver were noted as cities grappling with the hangover of significant supply added over the past decade. In those markets, even with fewer new projects now, the expanded room count means it might take longer for demand to catch up. Underwriting a hotel in such a market, one might assume a longer timeline to reach pre-supply-shock occupancy levels or require a more aggressive marketing plan to steal share. By contrast, in markets with high barriers to entry (e.g., beach resorts, historic city centers), an underwriter might be comfortable assuming occupancy can be maintained near historic highs because new competition won’t easily emerge. The class segment is also relevant: most new construction lately has been in the Upscale & Upper Midscale segments (often select-service brands). Luxury and upper-upscale supply is quite limited (only ~28,700 rooms under construction nationwide in that tier vs. ~84,600 in Upscale/UpperMid). So, a luxury hotel in a city might face very little new competition – which could help it keep pushing ADR. Meanwhile, a midscale hotel might see new competitors popping up off highway exits or near airports as that segment had more building until recently.

3. High Interest Rates and Capital Market Effects: The interest rate environment in 2024–2025 has been a pivotal factor for underwriting. The U.S. Federal Reserve raised rates significantly from 2022 into 2023, and while there have been recent pauses (and even a hint of cuts by late 2025), borrowing costs remain high. Hotels are feeling this in two ways:

• Financing Costs: Higher interest rates mean higher debt service for any new loan (or floating-rate loans). This directly affects DSCR calculations. A loan that might have carried a 4% interest rate now could be 7%+. Lenders respond by making sure the debt yields and DSCRs work at those rates, often leading to smaller loans (lower LTVs) than a borrower might have gotten a few years ago. It’s noted that lenders now prioritize cash flow metrics more heavily – for instance, requiring a certain debt yield (e.g. 13% or more for permanent debt) and tighter DSCR thresholds, which reduce leverage. For an underwriter, this means using today’s cap rates and interest rates in valuations and coverage tests, not the ultra-low rates of the 2010s. One side effect: fewer deals penciling out, which reduces transaction volume (as seen by the drop in hotel asset sales in 2023–2024). But for those deals that do happen, lenders are increasing loan structuring protections – requiring, for example, larger reserve accounts, quicker amortization, or springing cash management if performance slips.

• Impact on New Development: As mentioned, high rates have slammed the brakes on new construction financing. Many projects no longer appraise out with higher cap rates (values) and construction loans are expensive. Thus, fewer new hotels are breaking ground – a positive for existing asset performance. We’ve already covered this in supply. Another effect is on renovation PIP (Property Improvement Plan) decisions – owners facing brand-required renovations are finding the cost of capital high and return on that investment questionable if ADR growth is slowing. Some owners choose to defer or sell rather than refinance and renovate. Lenders underwriting an asset with a big upcoming PIP will factor in that cost and may hold back dollars or demand a capital plan.

• Refinance and Maturity Risk: The high-rate environment raises concerns for loans maturing in the next couple of years (many of which were originated when rates were low). Industry observers point out a wave of maturities – e.g., $114 billion of hotel loans coming due by 2027. If a hotel’s current DSCR is marginal at today’s rates, refinancing could be difficult unless performance improves or the owner injects equity. Lenders are increasingly scrutinizing an asset’s refinance risk as part of underwriting. This means considering: Will this hotel be able to take out my loan in 5 years? What exit cap rate and DSCR will it have then? It’s common now for underwriting models to include an exit scenario analysis (e.g., value the hotel at a higher cap rate in five years to ensure the loan can be refinanced or paid off). Many lenders bake in cap rate expansion of 75–150 bps in their projections for the exit to be conservative, given

  current low cap rates could rise if interest rates stay elevated.

In sum, high interest rates are forcing underwriting to be more conservative and structured. While they dampen new competition (good for operations), they make financing tougher – which is directly relevant to “defensible case building,” because any assumptions about future interest costs, cap rates, or refinance conditions need to reflect this reality.

4. Market Bifurcation by Class and Location: A recurring theme in 2024–2025 data is bifurcation – not all hotels are performing equally; disparities exist between luxury vs. economy, urban vs. resort, and so on. Underwriters need to acknowledge these differences rather than relying on broad averages. Some notable bifurcations:

• Luxury/Upper-Upscale vs. Economy/Midscale: In the current environment, higher-end hotels are showing more RevPAR growth, while the low end struggles. Through August 2025, U.S. luxury hotels achieved ~+3.1% RevPAR growth, entirely driven by ADR gains, whereas economy hotels saw RevPAR decline ~2.5%. In August alone, economy hotels’ RevPAR was down 5.7% year-over-year. What explains this? Partly a K-shaped recovery: affluent travelers and the luxury segment rebounded strongly with willingness to pay high rates (and perhaps fewer alternatives to luxury hotels), while lower-budget travelers have been more constrained by inflation and have more lower-cost alternatives (including economy hotels, budget airlines, or not traveling at all). Additionally, during the pandemic, economy hotels held up better (many stayed open for essential workers). Now that all hotels are back, some demand has shifted back to higher-end properties, leaving economy segment with less occupancy and even having to lower rates (hence ADR down ~1.5% in economy tier). For underwriting, this means if you are evaluating a luxury resort, you might assume it has more pricing power and potentially less occupancy volatility in the near term (since the wealthy continue to travel). Conversely, an economy roadside motel might need more conservative ADR assumptions (perhaps even declines in a soft market) and a closer look at competition. It’s important not to over-generalize though: luxury hotels can be very volatile in a recession (they were decimated in early 2020 as their clientele vanished, and in 2009 many cut rates drastically). Meanwhile, economy hotels can be somewhat stable by attracting frugal travelers and replacing lost business with other segments (some economy properties got housing contracts or long-term guests in hard times). So underwriting should consider where we are in the cycle – at this moment, luxury is outperforming, but if a recession hits, the script could flip (luxury might drop off and economy could hold relatively steady). A balanced approach might be to stress each according to its historical pattern: e.g., assume luxury hotel’s RevPAR could drop 20% in a recession (mostly via ADR cuts), and economy hotel’s RevPAR might drop, say, 10% (mostly via occupancy dips but ADR might already be low).

• Resort/Leisure Markets vs. Urban/Group Markets: Another bifurcation is by geography and hotel type. Resort destinations (coastal Florida, mountain resorts, etc.) have generally performed well, benefiting from leisure trends and limited supply. For instance, Florida’s coastal resorts and the Keys have so much demand and so little new supply that they’ve held onto high rates and occupancies. Underwriting a Florida beachfront resort, one might be bullish on long-term ADR growth (because affluent leisure demand is robust and supply constraints give pricing power). On the other hand, urban hotels reliant on group/corporate travel face more uncertainty, as noted earlier. Underwriting, say, a downtown Philadelphia or Chicago hotel that depends on conventions would involve asking: what if those big events don’t fully come back or rotate elsewhere? The Florida market update noted lenders are discounting risk more heavily for assets reliant on group or urban transient business, while offering better terms for resorts and high-barrier markets. This kind of differentiation is increasingly common – debt markets favor the “sure bets” of leisure-driven hotels at the moment.

• Sunbelt vs. Northeast (and other regions): Sunbelt markets (Southeast, Southwest) broadly recovered faster after COVID, thanks to domestic migration boosts, less stringent lockdowns, and popularity for leisure travel. The Northeast and West Coast urban markets lagged due to stricter COVID measures and reliance on international/business travel. However, by 2025 we see something of a convergence. New York’s metrics now actually outshine most Sunbelt cities in occupancy and rate; San Francisco, which was extremely hard-hit, posted +8% RevPAR YTD in 2025 indicating a strong rebound. Meanwhile, some Sunbelt markets are normalizing or softening (as noted: Phoenix down, parts of Texas flat or down slightly, etc.). For lenders, this means looking at each market’s specific story rather than assuming “Sunbelt good, big cities bad” or vice versa. It may be more about timing – Sunbelt hotels might have seen their big gains already, whereas a Northeast hotel might still have upside as business travel slowly improves. Also, internal migration trends (people moving to the Sunbelt) do bolster baseline hotel demand in those regions (due to more business activity, housing searches, etc.), so that’s a structural advantage that might persist. On the other hand, some Sunbelt cities like Dallas and Nashville have a reputation for lots of new hotel construction, which can keep performance in check. In underwriting region-specific dynamics, one should incorporate local forecasts: for example, MMCG’s research might show New York’s forward bookings and ADR remain strong through next year, but caution that Phoenix and Dallas face a more competitive landscape due to recent hotel openings.

• Special Factors: A few markets have idiosyncratic factors. Las Vegas had a down year in 2025 because 2024 was abnormally high (due to big events), creating a tough comparison. San Francisco is rebounding now after a deep trough (helped by improving sentiment and perhaps events like Dreamforce returning in force). New Orleans might see volatility due to events or lack thereof (as of 2025, New Orleans had a big ADR jump ~+9% but occupancy down, yielding RevPAR +5%, which could indicate fewer visitors but higher spend per visitor – perhaps fewer low-budget tourists, more high-end events). The takeaway is that each market has nuances.

For lenders focusing on Sunbelt cities like Miami, Dallas, Phoenix and Northeast cities like New York, Boston, understanding these nuances is vital. Let’s briefly highlight those examples:

• New York, NY: RevPAR leader, hitting $276 in 2025 (up from ~$260 in 2024). Benefits from global tourism returning and limited new Manhattan hotel construction (after a 2022 law restricting new hotels without special permits). Risks include high operating costs (union labor, property taxes), and sensitivity to foreign travel trends and office worker return rates. Underwriting NYC might still assume top-tier performance, but stress scenarios should consider its historical volatility (NYC was one of the hardest hit in both 2001 and 2020, for instance).

• Boston, MA: High average rates (ADR >$230) but little growth currently. Boston has a diversified demand (education, medical, tech, tourism) but also strict development limits. It tends to be steadier but not high-growth. Underwriting should focus on seasonal patterns (strong spring/fall, weak winters) and convention calendar. A moderate, stable outlook may be appropriate.

• Miami, FL: A superstar of recent years – international leisure and domestic escape combined to give Miami among the highest ADRs in the country (~$225, with RevPAR ~$166). Luxury resorts in Miami have seen record profits. Going forward, one must weigh that Miami’s growth might slow simply because it’s so far above 2019 already. Also, Miami has some new supply coming (though many projects are condo-hotel or high-end). An underwriter might still model Miami to outperform many markets (due to global appeal and no state taxes drawing businesses), but also consider climate/hurricane risk and insurance costs, which can affect operating expenses and thus cash flow.

• Dallas, TX: A business-heavy market with steady population growth and a diverse economy. Dallas’s hotel performance has been good, not spectacular. Plenty of new hotels have opened in recent years (including many select-service in suburbs). Underwriting Dallas, lenders likely use conservative occupancy (it rarely gets as high as coastal tourist cities) and moderate ADR growth. Group demand (Dallas has a large convention center and many corporate events) can boost certain years. A key is to evaluate the specific submarket (Downtown? Frisco? Arlington?) as performance varies widely across DFW.

• Phoenix, AZ: A Sunbelt leisure/business hybrid market. It had a huge tourism boom after COVID (people flocking to Scottsdale resorts, etc.), and also benefits from winter snowbirds and events (Phoenix Open, etc.). But with so much development over the last decade, Phoenix is experiencing softening demand and limited pricing leverage in 2025. Lenders will likely underwrite Phoenix hotels with the knowledge that summers are very low season (cash flows can be slim in July/August) and that competition is fierce. Yet, long-term, Phoenix has favorable demographics and growing corporate presence (especially in suburban tech corridors), so it’s a balance of short-term caution and long-term optimism.

5. Cost Inflation and Operating Trends: While not explicitly asked, it’s worth noting that underwriting now must consider expense-side issues too. High inflation in 2022–2023 drove up wages, utilities, and insurance for hotels. Many markets, like Florida, have seen insurance cost volatility (hurricane exposure causing premiums to soar). Labor shortages led to higher pay and in some cases reduced services (some hotels cut daily housekeeping, etc., which can permanently lower costs but also affect guest satisfaction). Lenders will examine a hotel’s expense ratios and see if assumptions (e.g., returning to pre-pandemic service levels) might increase costs. Profit margins in 2025 are reportedly under pressure despite decent revenues, due to inflation. Underwriting might incorporate more conservative margin assumptions or require interest reserves if margins are expected to dip and threaten coverage.

In conclusion, current market trends present a mixed picture: demand growth is plateauing, supply is constrained, costs and rates are high, and performance varies widely by segment and location. A defensible underwriting case in this context is one that uses realistic, data-driven inputs: for instance, using the latest year-to-date RevPAR trends (which in Q3 2025 are slightly negative to inform near-term projections, rather than assuming a rosy 5% annual growth. It also means staying alert to changes – e.g., if weekly data shows occupancy sliding or if booking pace for groups is down, the underwriter might adjust scenarios on the fly. The best loan models are iterative and can be tweaked as new data emerges (such as STR weekly reports or economic indicators).

Best Practices for Defensible Hotel Underwriting Amid Uncertainty

Given the volatility and complexity discussed, what can lenders and investors do to build a defensible case when underwriting hotel assets? Here are several best practices and strategies:

• Use Conservative Assumptions Grounded in History: It’s crucial to anchor projections in historical reality, especially for downside cases. Look at the property’s past performance (if available) over at least one full cycle, and the market’s historical ADR, occupancy, and RevPAR patterns. If the hotel’s best year was a RevPAR of $100 and worst year was $70, be wary of a base case assuming $110 RevPAR next year without strong support. Underwrite with a cushion – for example, some lenders now explicitly model -3% to -5% occupancy versus current levels and only flat to +1% ADR growth in their base cases, reflecting a conservative stance in an uncertain economy. This doesn’t mean you expect performance to decline, but it gives breathing room. If the deal still works with those haircuts, it’s a safer bet. Any upside beyond that is gravy for the borrower/investor.

• Incorporate Multiple Stress Scenarios: As elaborated earlier, run at least one, if not several, downside scenarios. What if RevPAR drops 10%? 20%? 40%? Identify the breakpoints – e.g., at what point does DSCR fall below 1.0, or the debt yield fall below, say, 8%? Those are critical thresholds. By presenting these scenarios, you can show stakeholders (credit committee, investment partners) that you’ve thought through the bad cases. It also helps in structuring deals: if a modest downturn makes DSCR unacceptably low, you might structure an interest reserve or ask the sponsor to put up more equity to lower the loan amount. Many term sheets now include covariance triggers (like a cash sweep if performance falls X% below underwritten NOI). These are informed by stress scenario results. Ultimately, a loan that can withstand a reasonable downside (say a 10-15% NOI drop) without default is far more defensible.

• Segment and Scrutinize the Cash Flow Components: Don’t treat the hotel’s cash flow as a black box. Break down the revenue by segment, and expenses by category, to see where vulnerabilities lie. If, for example, 30% of revenue comes from the hotel’s restaurant and banquet operations, consider what happens to that in a downturn (often group cancellations hit banquet revenue hard). If the hotel is heavily dependent on one big customer (a single corporate account or a contract), consider the risk if that account is lost – perhaps have a contingency plan or highlight the strength of that relationship. Conversely, if a certain segment provides a safety net (like long-term contracts or essential traveler demand), emphasize that in the underwriting case as a mitigating factor. One best practice is to have separate mini-cases for key segments: e.g., model transient and group demand separately in a downturn. This was discussed earlier and it really strengthens the analysis. It can also reveal insights, such as: “Even in our severe downturn model, we assumed the government contract for 50 rooms/month remains in place, contributing $500k annual revenue, which helps keep the hotel cash flow positive.” That level of detail can make a credit committee more comfortable.

• Stay Updated with Market Data: The hotel industry has the advantage (and curse) of abundant data at high frequency. Leverage it. Use sources like STR reports, Tourism Economics forecasts, and internal MMCG research to keep your assumptions current. For instance, if you’re underwriting in October 2025, you should know that year-to-date U.S. RevPAR is flat and Q4 is projected to be slightly down, and thus temper any expectations of near-term growth. If early 2026 booking trends or macro indicators (like GDP or consumer confidence) change, adjust your model. A defensible case is one that would be credible if later audited against the information that was available at the time of underwriting. It’s a bad look if someone asks “Why did you assume 5% ADR growth in 2025?” and the answer is “because historically that hotel grew at that rate” – ignoring that current data pointed to a slowdown. Instead, tie assumptions to sources: e.g., “Occupancy is underwritten to remain ~65% next year, aligning with the market’s recent 12-month trend of 62-63% and factoring in the subject hotel’s planned marketing push.” And don’t just set it and forget it – monitor performance during the loan term. Best practice for asset management is to track monthly STR comps and flag if the hotel is deviating from underwritten expectations so proactive steps can be taken.

• Emphasize Sponsor Strength and Track Record: Underwriting a hotel is not just about the property; it’s also about the sponsor (owner/operator). Especially in choppy markets, a strong sponsor who has experience managing hotels through cycles is a huge plus. Lenders are increasingly selective, favoring borrowers with deep hospitality expertise and solid equity. In fact, sponsors are now expected to bring more equity and demonstrate a track record as part of the deal. A defensible case will highlight if the sponsor has successfully weathered past downturns, if they have additional liquidity to inject if needed, and if their interests are aligned (significant cash equity in the deal). This can compensate for some performance uncertainty. For instance, a credit memo might note, “The sponsor (XYZ Hospitality Group) navigated the 2009 recession with only a 5% RevPAR decline across their portfolio vs. 17% national average, and in 2020 they kept all hotels current on debt through proactive cost-cutting and capital injections. They are committing $X million of cash (Y% of cost) to this acquisition, indicating confidence and providing a buffer for the unexpected.” Such narrative strengthens the case even if the numbers show tight margins.

• Build in Structural Protections: Lenders can make a case more defensible by structuring loans to mitigate known risks. For example, setting aside interest reserves or required FF&E reserves ensures money is available for debt service and property upkeep even if cash flow dips. Tighter covenants (like requiring a minimum DSCR each quarter or else cash gets trapped) can reassure that if things go off track, corrective action will be forced. The Largo Capital hospitality update noted deals are including more robust liquidity reserves and covenants now. When presenting an underwriting, explicitly mention these: e.g., “We have underwritten a 6-month interest reserve to cover debt service during the ramp-up period” or “The loan will include a cash sweep if DSCR falls below 1.20×, which our base case does not project but our stress case might trigger – giving us early control in a downside scenario.” Such features make the loan safer and the underwriting easier to justify under adverse conditions.

• Account for Capital Expenditures and PIPs: A common pitfall in underwriting is to focus on operational cash flow and ignore that hotels periodically need big capital investments (renovations, brand PIPs). A defensible underwriting will identify any upcoming PIP requirements (often flagged by franchisors every 7 years or so) and either include that cost in the model or ensure the borrower has a plan to fund it. If a hotel needs a $10M renovation in year 3, you should not assume everything is rosy – either the owner must invest more (affecting returns) or performance might suffer if the renovation is deferred. Lenders sometimes mitigate this by holding back loan proceeds for capex or requiring escrowed reserves. Including these in your case shows you’re looking beyond just RevPAR to the whole lifecycle needs of the asset.

• Differentiate by Submarket and Asset Quality: We touched on this earlier – not all hotels, even within a city, are equal. A best practice is to compare the subject hotel to its competitive set. How is it ranked in ADR and occupancy in its STR comp set? Is it a market leader or a laggard? Underwriting should reflect that. If the hotel historically underperforms the market, don’t assume it’ll magically meet market averages (without a compelling renovation or rebranding plan). If it’s a leader, perhaps it has more resilience. Also, consider things like brand strength (a strong brand might bring stable loyalty demand), property condition, and any special demand generators (next to a theme park, university, hospital, etc.). These factors can be defensive moats or risk factors. For example, if underwriting a hotel in a one-industry town (say, an oil & gas market in West Texas), know that its fortunes will rise and fall with that industry – perhaps a higher risk than a diversified city hotel. Thus, you might use a higher cap rate or lower underwritten occupancy to reflect that volatility.

• Monitor and Adapt Quickly: Finally, even after the loan is made or the investment is done, continue to use a data-driven approach. Monitor weekly/monthly performance. The Largo Capital guidance suggests tracking weekly RevPAR and reacting in near-real-time. If an economic storm is brewing, asset managers should start contingency planning (e.g., cost cuts, sales initiatives). Lenders who securitize or hold loans might incorporate triggers or covenants that require updated forecasts if performance drops. Essentially, a defensible underwriting case extends into a defensible asset management plan. By showing that you have an eye on the future and will take action as needed (rather than assuming straight-line growth), you present a more convincing, prudent approach.

Conclusion

Underwriting hospitality assets has always required a blend of art and science, but in today’s environment, the science – data-driven analysis and rigorous scenario planning – is more critical than ever. We have explored how ADR and RevPAR volatility, demonstrated vividly in recent years, necessitates careful case-building for lenders and investors. The U.S. hotel landscape in the Sunbelt, Northeast, and major metros is experiencing both opportunities (e.g., high leisure demand, low new supply) and challenges (e.g., muted growth, high costs, interest rate pressures). By focusing on key metrics like ADR, RevPAR, and DSCR and truly understanding what drives them, underwriters can better quantify risk.

The use of historical patterns from our MMCG database in crafting stress scenarios ensures that projections aren’t overly optimistic. Segmenting demand into transient, group, and business components allows for more granular (and defensible) cash flow modeling, highlighting both the strengths and vulnerabilities of a hotel’s income stream. We’ve seen that recent trends – from the construction slowdown to the divergence between luxury and economy hotels – should directly inform underwriting assumptions, whether it’s giving credit for limited supply in Miami or cautioning a drop in economy hotels’ rates nationwide.

In practice, building a defensible case means justifying every assumption: Why is ADR growth x%? Why will occupancy hold at y%? The answer should be because data or history suggests so, and here’s how the asset will achieve it (through market dynamics or sponsor actions). It also means planning for the worst (within reason) and structuring deals to withstand those blows. Lenders that follow the best practices outlined – conservative baseline, multiple stress tests, strong covenants, segment analysis, etc. – will be better positioned to weather the next downturn. Investors, too, will find that this rigorous approach helps avoid overpaying or over-leveraging based on rosy forecasts.

Ultimately, the hospitality sector will always have uncertainties – travel patterns shift, economies cycle, black swan events occur. But with thorough analytical underwriting, lenders can build cases that are resilient and credible, supporting sound decision-making. In doing so, they not only protect their downside but can lend with confidence to the right projects, even amid uncertainty. By expecting volatility and preparing for it, one can still underwrite profitable hotel investments that can thrive across cycles – turning the industry’s notorious ups and downs from a hazard into a managed risk.

In these volatile times, the adage for hospitality underwriting might well be: hope for the best, but underwrite for something a bit less. By following that philosophy – backing it with data, experience, and prudent structuring – lenders and investors can continue to find opportunity in the dynamic hotel market while keeping their capital safe. Defensible underwriting is not about pessimism; it’s about realism and robustness, which ultimately benefit all parties involved.

October 23, 2025, by a collective authors of MMCG Invest, LLC, hotel feasibility study consultants.

Sources: 

Core Industry & Market Data:

• Tourism Economics (2025). U.S. Travel Outlook: Forecast Update Q3 2025. Oxford Economics Group.

• American Hotel & Lodging Association (AHLA, 2025). State of the Hotel Industry 2025. AHLA Research Department, Washington D.C.

Capital Markets & Underwriting:

• CBRE Hotels Research (2025). U.S. Lodging Forecast: 2025–2028. CBRE Econometric Advisors.

• JLL Hotels & Hospitality Group (2024). Hotel Investment Outlook 2025. JLL Capital Markets.

• PwC (2025). Hospitality Directions U.S.: Q3 2025 Update. PricewaterhouseCoopers LLP.

Academic & Analytical References:

• Cornell Center for Hospitality Research (2023). Modeling Revenue Volatility and Credit Risk in Hotel Finance. Cornell University School of Hotel Administration.

• Moody’s Analytics (2025). Commercial Real Estate Outlook: Lodging and Leisure Segment. Moody’s Investors Service.

• U.S. Bureau of Labor Statistics (2025). Consumer Price Index and Employment Situation Reports (Hospitality Sector).

Optional Supporting Citations (if international context is mentioned):

• UN World Tourism Organization (UNWTO, 2024). World Tourism Barometer – Travel Recovery Patterns.