PERSPECTIVE
THAT’ S CAP
HOTEL CAP RATES ARE LEGACY METRICS. DO THEY MATTER?
By DANIEL H. LESSER, CEO, LW HOSPITALITY ADVISORS
A
capitalization rate, or cap rate, is a ratio that can be used to estimate the value of income-producing properties. Put simply, a cap rate is the percentage of net operating income( NOI) to property asset value. For example, a $ 10-millionsale price of a property that produces an annual net cash flow of $ 900,000 results in a calculated capitalization rate of
9.0 %($ 900,000 /$ 10,000,000).
A comparatively lower cap rate indicates less risk associated with an investment, while a relatively higher cap rate points toward more risk. Factors considered in assessing risk include creditworthiness of a tenant; term of lease; durability of the income stream; quality and location of the property; capital markets / debt availability; and general volatility of the market.
Use of a cap rate implies a durable and stable income stream, either in place or projected. It is important to note that, unlike investors of other types of commercial real estate, such as office and multifamily, sophisticated hotel investors do not typically formulate pricing decisions using a single cap rate applied to one year’ s NOI, whether
30 hotelsmag. com July / August 2026