By Ryan Bosch
Hotel investors celebrating the Fed’s recent rate cut may be celebrating too early.
The Sept.17 reduction from 4.25% to 4%—with two more cuts potentially coming—will provide immediate relief for floating-rate construction and bridge loans. However, permanent financing, which accounts for the bulk of hotel transactions, remains tied to stubbornly high Treasury yields: the 5-year Treasury yield stands at 3.67% and the 10-year yield at 4.11% as of Sept. 22. This fall may prove to be a “Tale of Two Markets” for hotel investors.
Looking to the end of the year, here is a little more context about what can be expected.
Loan type determines everything
Let’s start with the good news. The rate cuts will give floating-rate borrowers immediate relief. This includes investors seeking construction loans, bridge financing and SBA debt tied to SOFR or Prime. Further, borrowers with a SOFR + 300 basis points construction loan have just realized significant savings.
Permanent financing, which makes up the majority of hotel loans, functions differently. Banks, CMBS lenders and life companies set their coupons according to Treasuries, meaning that 5-year loan prices are priced over the 5-year Treasury, and a 10-year loan over the 10-year Treasury. Treasury rates aren’t aligning with the Fed’s dovishness, and the forward curve shows them drifting higher through 2026.
The Treasury problem
So why aren’t Treasury rates dropping along with the Fed’s?
There are three structural forces keeping Treasury yields elevated:
- Market expectations. The Fed moves have been on investors’ radars for a while now—forward curves from much earlier in 2025 were showing this drop. Additionally, bond traders aren’t surprised by a dovish Fed because they priced the forward curve in when recession fears peaked earlier this year.
- Fiscal reality. The U.S. debt-to-GDP ratio—which is sitting near 120%—is reducing the global appetite for Treasuries. Foreign buyers, particularly China and Japan, have been net sellers, forcing domestic investors to demand higher yields.
- Unusual cycle. Usually, Fed and Treasury rates drop in tandem. The Fed typically cuts into a recession, and Treasury yields collapse as a result of economic pressure. This time, the Fed is cutting preemptively as our economy slows, but continues to show resilience.
The hotel market reality
All of the above have created a unique lending environment. Construction and bridge borrowers are getting a lifeline, and SOFR-based loans will become meaningfully cheaper, helping developers manage cash flow on projects already underway.
For those seeking permanent debt relief, options have been limited. A borrower seeking a 10-year loan today pays roughly the same spread over Treasuries as six months ago (between 250 and 450 basis points, depending on asset quality), and Treasury yields have only edged down slightly.
For example, a borrower seeking a 5-year fixed loan today would price off the 5-year Treasury, which closed at 3.67% on Sept. 22. Adding a 275 basis point spread puts the all-in coupon near 6.4%. Six months ago, when the 5-year Treasury was 4.08%, the same structure would have landed around 6.8%. That 40-basis-point drop is real, but it is incremental—not the step change many investors expected from Fed cuts.
Asset valuations will also face continued pressure. When investors can earn 4.11% risk-free on 10-year Treasuries, they will demand meaningful spread premiums for hotel risk. Cap rates will remain elevated, limiting value upside even as properties show operational improvements in many markets.
Going forward
The Fed may deliver two more cuts by December, which could bring the funds rate as low as 3.50%. That will continue to benefit floating-rate borrowers, but it will not necessarily move the Treasury needle.
It is important to remember that the Treasury forward curve reflects market expectations, not certainty. These projections can change quickly in response to inflation data, fiscal policy or global events. Investors should treat the curve as a guide, not a guarantee.
For hotel investors, the playbook is clear: budget for current Treasury levels plus normal spreads on permanent loans, and build flexibility into development models. Use the relief on floating-rate debt to your advantage, but plan conservatively for fixed-rate takeouts. Those who underwrite with discipline and stay close to the market will be best positioned when conditions finally improve.
Ryan Bosch, principal at Arriba Capital, is a seasoned expert in hospitality debt and structured finance, managing a portfolio exceeding $2 billion across 140 deals.
This is a contributed piece to Hotel Business, authored by an industry professional. The thoughts expressed are the perspective of the bylined individual.
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Source: hotelbusiness.com
