Assumed lower interest rates will help, but costs remain
high and first-time developers still struggle with financing.
Note: Read Part 2 of this feature discussing where and what to develop in 2026.
NATIONAL REPORT – Pipelines have been filled predominantly
with conversions as recent data reflects some of the slowest new development outlooks
in several years. Even announced new developments are hard to get off the
ground. So, it should come as no surprise that developers in 2025 had to
sharpen their pencils extra pointy to make new deals work because of still-high
interest rates, still-expensive construction costs and an outlook suggesting
performance could be flat-ish in 2026.
At the same time, available capital has been much more
interested in the financial dynamics surrounding below-replacement-cost acquisitions
versus someone selling a new development project where it can be easy to poke
holes.
So, will the new development environment improve in 2026?
That is the question we posed to three executives working for U.S.-based developers
known for building. Big picture, they know how to write pro formas that make
sense and they have track records to attract capital and debt. So, the quick
answer for them is 2026 will continue to present new development opportunities.
And, if interest rates continue to drop, they expect more deals to pencil and
new development pipelines to grow.
We also asked development leaders Mary Beth Cutshall of
Vision Hospitality Group, Ben Pierson of Rockbridge and Kathleen Hollis of First
Hospitality if they have more clarity about the overarching macros and for the
most part they did not but agreed that is not a deterrent.
The size of deals is getting bigger, which means you need more access to capital. That’s really the threshold you have to cross.
Ben Pierson
Cutshall said Vision definitely has more clarity as they are
very focused on certain new development paths. “We have nine to 10 projects in
our pipeline. So, we do,” she said. “But that being the case, just speaking for
the industry and the environment, I would say that December 2025 is a lot noisier
and more unpredictable than January. 2025. The months throughout 2025 brought
swings. Day by day, it’s been difficult to know economically the exact
direction. So, we, like everybody, have had to navigate that and do our best.
So yeah, it has been a bit different, to say the least.”
First Hospitality’s Hollis first explained how they have
been a fairly active developer since the early-1990s and including adaptive
reuse have developed more than 25 projects.
“We are bullish on development throughout all cycles, and
always think that there’s a way to add value,” she said. “In terms of clarity,
from where we sit today, there is quite a bit more clarity than where we were
one year ago – but it’s been a wild ride in between. Liberation Day in early Q2
absolutely rocked our whole industry, but developers, in particular. I would
also say that the third and fourth quarter’s three much-anticipated rate cuts
was really helpful to understand what financing is going to look like going
forward.”
The 75-basis point cut was helpful, Hollis continued,
calling the current debt market “A Tale of Two Cities.”
“If you are a credible sponsor with a strong track record,
have a good brand, a good manager, and a good site, actually financing isn’t
great, but it’s not terrible, and it doesn’t destroy projects.”
But, she added, first time hotel developer, even those with
other incredible commercial real estate experiences, are really struggling to
get hotel projects financed.
What the cuts will catalyze, Hollis said, is hotel
transactions among existing cash-flowing assets. “While that would certainly be
good for our industry, you’re still left with that allocation of capital
question of does it make sense to develop or to buy.”
Rockbridge’s Pierson said he is seeing banks focusing on their
best customers and clients, the ones that performed well over the prior years. Even
as interest rates continue to come down in 2026 and more deals pencil out, he
added, lenders will increase activity but will still be a bit picky about their
partners.
Constraints remain
On the development side, the bigger issue, according to
Hollis, is just how expensive it is because of hard costs.
They [an institutional lender] were favorable to working with us because of our track record. I think that is where the rubber meets the road. Predominantly, we are working with relationship lenders that we’ve been cultivating for many years, but we are also opening the doors to more institutional lenders when it makes sense.
Mary Beth Cutshall
“To develop a select-service asset right now you’re well
north of $300,000 a door. It’s ridiculous,” she said.
Cutshall believes that financing remains a primary
constraint to new development. Quite simply, she added, fewer new deals are “penciling”
because of higher interest rates, tightening underwriting standards and the
need for low leverage.
“Vision Hospitality Group is very fortunate. This is our
bread and butter,” Cutshall said. “We’ve been doing new development for 28
years and built many hotels. Our lender relationships are very strong. We
refinanced throughout 2025 with terms that were favorable.”
Rockbridge’s Pierson said that while complex luxury
lifestyle developments are always challenging, the dynamics for developing even
select-service assets has fundamentally changed as the branded landscape has
become more saturated and consumers demand a lifestyle experience no matter the
product type.
“The cost of entry and capitalization size of those projects
has grown so that even upper upscale and upper-end select-service options have
significant development costs,” he said. “The size of deals is getting bigger,
which means you need more access to capital. That’s really the threshold you
have to cross.”
Throw on top of that the challenges of finding debt and
fewer people are built for that type of project size, Pierson added. “And, oh,
by the way, the people that traditionally capitalize 60% to 65% of construction
projects are backing away from the market,” he continued. “So, I think that’s
created over the last three years, at least, a really hard [development] landscape.”
Pierson added that investors like confidence and clarity and
the introduction of the tariff policy created uncertainty in the market. “That
has been a challenge and a distraction. But I think labor and trade
availability persists,” he said, especially in markets where there is a lot
activity from institutional or data center developers.
He also said mechanical, electrical, plumbing (MEP) trades
are another big focus, again pointing to data center development as a big
culprit.
Sourcing debt
Cutshall also confirmed growing discussions surrounding the
slow return of institutional lenders to the hospitality space, adding Vision
recently closed a refinance with an institutional bank and got really good
terms.
There is a world in which development does become a lot more palatable very quickly. It’s possible a few more rate cuts will happen and there could be a lot of changes in 2026 that make development more palatable than we’re thinking.
Kathleen Hollis
“They were favorable to working with us because of our track
record. I think that is where the rubber meets the road,” Cutshall said. “Predominantly,
we are working with relationship lenders that we’ve been cultivating for many
years, but we are also opening the doors to more institutional lenders when it
makes sense.”
Hollis agreed that institutional debt is returning, but
added hotels are still facing a bit of a perception issue from institutional
groups who play in all of the asset classes.
“I think it’s a combination of stagnant RevPAR growth
projected over the next few years, but above inflationary wage growth in most
markets, that are leading to real concerns about NOI degradation, which is
never what you want for an existing cash flowing asset, but especially for
development,” she said. “Generally, to make your project pencil, you need to be
able to assume you have a few years of market growth going on. And if you can’t
count on that, it’s tricky.”
While a lot of uncertainty remains to suggest new hotel development
is going to rebound in a dramatic way, Hollis closed by saying last year
prepared everyone for the unexpected development from the current White House
administration and maybe the next surprise could be a positive for developers.
With tongue somewhat planted firmly in her cheek, Hollis
said costly tariffs could disappear as quickly as they appeared. “There is a
world in which development does become a lot more palatable very quickly. It’s
possible a few more rate cuts will happen and there could be a lot of changes
in 2026 that make development more palatable than we’re thinking.”
Pierson added another note of optimism saying while 2025 was
a particularly volatile year in terms of inflation, tariffs and the interest
rate environment, he suspects that 2026 will settle down and the hotel industry
is going to see a more stable environment.
“A little more stable macro and interest rate environment
will be helpful,” he said. “But we are focused on opportunity in 2026 and
beyond and see a lot of opportunity to grow our platform, both in development
and otherwise, and specifically in the luxury lifestyle space.”