Inflation and Investor Appetite: What Hotel & CRE Developers Need to Know When Presenting Funding Proposals

In today’s elevated inflation environment, hotel developers face a dual challenge: navigating higher costs while aligning with investor expectations. As inflation persists at roughly 4–5% annualized, financing dynamics are shifting. For example, a recent expert report noted inflation-linked contraction in RevPAR—rising only 1–2% in economy segments compared to 4.2% in luxury tiers—has squeezed margins and changed risk–return calculus across asset classes.

Inflation may be easing from its 2022–23 peaks, but it remains a fixture in every funding conversation. The OECD now predicts average member-country inflation of 4.2 % for 2025, noticeably higher than forecasts just six months ago. Rising prices, higher policy rates, and stickier building costs are reshaping how capital providers judge risk—and how developers must frame their projects to win approval.

Money is also harder to find. MSCI data show U.S. commercial-property sales slid to US $26.1 billion in April 2025, and hotel transactions plunged 52 % year-over-year. As banks retreat, debt funds, insurers, and sovereign investors are filling the gap—demanding higher returns and tougher terms.

Regional Pulses

Americas. Deal count is up, but underwriting is cautious. Bank pullbacks have opened space for private-credit funds to finance senior debt—if projects show clear inflation hedges.

EMEA. Transaction volume hit US $55 billion in Q1 2025 (up 41 %). Energy-linked construction inputs and insurance premiums are top stress-points in loan models.

Asia Pacific. CBRE logged US $32.8 billion in Q1 trades. Japan led inflows with ¥1.9 trillion in cross-border deals, boosted by investors hunting yen-cheap assets that can ride above-target inflation.

How Inflation Is Re-shaping Investor Approval Criteria

• Tougher Stress Tests: Investors now run models assuming interest rates could jump by 2–3 percentage points and costs could rise by 5–9% each year. They also expect projects to show that they can still hit a 1.4× debt-service coverage ratio at exit.

• Focus on Re-priceable Income: Properties that can adjust rents quickly—like hotels, multifamily, and data centers—are more attractive than long-term office or single-tenant retail because they better hedge inflation risk.

• Bigger Equity Stakes: Sponsors now need to put up 5–10% more equity, so there’s a larger cushion to absorb unexpected construction-cost volatility.

• Built-in Cost Buffers: Financing agreements now include tariff-linked reserves and price-escalation clauses for FF&E (furniture, fixtures, and equipment) to avoid surprise funding gaps mid-construction.

• Reward for Readiness: Projects that have locked in guaranteed-maximum-price contracts and secured key suppliers—so they’re shovel-ready —get priority, since they’re less exposed to further cost increases.

Investors remain active—94 % of respondents to CBRE’s 2025 U.S. Hotel Investor Intentions Survey plan to keep or boost their hotel investments this year—but they are more selective. Today’s winning proposals all have three things in common: clear assumptions about inflation, solid protection against downside risks, and built-in ways to achieve returns above the rate of inflation.

5 Ways To Make Your Funding Proposal Inflation-Ready

1. Start with today’s numbers. Base RevPAR, rent growth, and exit cap rates on current CPI (Consumer Price Index) paths and forward interest curves for each market.

2. Show the hedge, not just the hope. Present fixed-price (or capped-index) sub-contracts, interest-rate caps, and commodity swaps that cover at least 70 % of your cost base.

3. Build Real-Time Revenue Adjustability: Highlight brand, segment, or lease structures that allow frequent price resets—dynamic ADR strategies in hospitality, CPI-linked escalators in logistics, or green-lease clauses tied to energy cost savings.

4. Illustrate Exit Liquidity: Reference comparable sales and debt‐fund take-outs even in the current lower-volume market; evidence that similar assets are trading gives credit committees confidence.

5. Show meaningful skin in the game. Detail equity at risk, milestone-linked draw schedules, and transparent cost-tracking dashboards that allow lenders early warning on variance.

Looking Ahead

Inflation affects every part of a deal: materials, labour, insurance, and, crucially, the cost of money. Developers who confront these pressures head-on—by using real-time data, embedding hedges, and structuring conservative leverage—stand out in a capital market that is both liquid and demanding.

Partner with Capital Corp Merchant Banking. For more than three decades, Capital Corp has guided clients through inflationary spikes, currency swings, and policy shifts across the Americas, EMEA, and APAC. Our merchant-banking platform combines deep advisory expertise with direct access to debt, mezzanine, and equity capital that understands construction risk in today’s market.

Partner with Capital Corp to stress-test your numbers, structure inflation-proof financing, and lead your next commercial development to a successful, timely closing in today’s challenging macro-climate.