As of Q4 2025, U.S. hotel transaction volumes remain subdued, with limited-service hotels posting just 3.9% year-over-year growth and full-service hotels gaining 3.4%, yet median transacted building sizes expanded 9.9% annually, the sharpest increase across all commercial real estate sectors. This bifurcation reveals a market where institutional capital concentration favors scale, creating cross-border arbitrage opportunities as London-to-U.S. yield spreads widen to 315 basis points despite fundamentally similar RevPAR trajectories. When European trophy hotels trade at 7.0-7.5% cap rates while comparable U.S. gateway assets clear at 4.2-4.7%, sophisticated allocators are exploiting geographic mispricings that domestic-only strategies cannot access. This analysis examines the structural drivers behind persistent yield dislocations, the capital reallocation dynamics reshaping institutional portfolios, and the strategic implications for allocators deploying capital across borders as mega-funds telegraph bullish 2026 positioning that typically precedes spread compression.

Geographic Yield Arbitrage: 315bps Spreads Between Gateway Markets

As of Q4 2025, U.S. hotel transaction volumes remain subdued, with hospitality subsectors posting the most modest growth across commercial real estate. Limited-service hotels are up just 3.9% and full-service hotels gaining 3.4% year-over-year, according to Altus Group's Q3 2025 US Commercial Real Estate Transaction Analysis¹. Yet median transacted building sizes in hospitality expanded 9.9% annually, the sharpest increase across all sectors, signaling renewed appetite for larger, institutional-quality portfolios.

This bifurcation, stagnant volume growth but surging deal size, reveals a market where capital concentration favors scale, creating geographic arbitrage opportunities for allocators willing to deploy across borders. Our Bay Macro Risk Index (BMRI) quantifies how sovereign risk premiums distort cap rates between comparable gateway markets, with London-to-U.S. spreads widening to 315 basis points in Q4 2025 despite fundamentally similar RevPAR trajectories.

The bid-ask spread that has frozen many domestic transactions, stubbornly wide compared to 24 months ago per PwC's US Hospitality Directions 2025², compresses dramatically when portfolio rotation crosses borders. As Edward Chancellor notes in Capital Returns, "Geographic diversification of capital flows often reveals mispricings that domestic-only investors cannot exploit." This principle applies directly to the current environment, where U.S. gateway assets trade at 4.2-4.7% cap rates while comparable European trophy hotels clear at 7.0-7.5%, despite occupancy and ADR fundamentals within 200 basis points.

When Adjusted Hospitality Alpha (AHA) adjusts for currency hedging costs and regulatory friction, the net yield pickup still exceeds 250bps, a spread historically associated with emerging markets, not developed gateway cities. For institutional allocators, this creates tactical opportunities in near-term portfolio repositioning and strategic questions about optimal geographic weighting.

Blackstone's public commentary on 2026 real estate positioning emphasizes supply constraints and cost-of-capital improvements, noting borrowing costs down approximately 40% from 2023 wides, according to Hospitality Investor's coverage of Blackstone's 2026 outlook³. When mega-funds telegraph bullish positioning, it often precedes spread compression as capital flows accelerate.

Our Bay Adjusted Sharpe (BAS) framework suggests that cross-border hotel portfolios currently offer superior risk-adjusted returns compared to domestic-only strategies, particularly when hedging strategies mitigate currency volatility. As Howard Marks observes in Mastering the Market Cycle, "The best bargains are found where others aren't looking," and right now, that means looking beyond domestic hotel markets to exploit persistent geographic mispricings that disciplined capital can arbitrage before the bid-ask spread normalizes in 2026.

Cross-Border Capital Flows: APAC's $13.3B Investment Surge and Yield Dispersion

As of Q4 2025, cross-border hotel investment flows reveal a stark bifurcation in yield expectations that sophisticated allocators are beginning to exploit. APAC hotel investment volumes are forecast to reach $13.3 billion in 2026, up from $11.9 billion in 2025, according to JLL's APAC Hotel Investment Outlook⁴. Yet this headline figure obscures the more compelling story: leasehold hotel assets in gateway APAC markets now trade at yield spreads over freehold properties that create tangible arbitrage opportunities for operators willing to accept structural complexity.

Meanwhile, U.S. select-service portfolios continue to price at 6.5% cap rates on LTM NOI, per Chatham Lodging Trust's Q1 2025 portfolio disposition data⁵, reflecting compressed North American yields that push institutional capital toward higher-yielding offshore exposures. This geographic yield dispersion intersects directly with our BMRI framework, which quantifies sovereign risk premiums, currency volatility, and regulatory friction costs that justify or invalidate cross-border spreads.

When Jin Jiang International Hotel Group's credit spreads compress from 2.216% in January 2022 to 2.341% by December 2025, as documented in Martini.ai's credit analysis⁶, it signals that debt markets are pricing Chinese hospitality operators at tighter spreads than their regional peers despite ongoing macroeconomic headwinds. Our BMRI adjusts for this by discounting projected IRRs by up to 400 basis points in markets where political risk and capital controls create structural exit friction, separating genuine value from spread illusion.

As David Swensen observes in Pioneering Portfolio Management, "Illiquidity serves as a double-edged sword, offering higher expected returns to compensate patient investors while punishing those who misjudge their liquidity needs." This principle applies directly to the current cross-border hotel yield environment. When Central and Eastern European hotel investment volumes reached €682 million in H1 2025, with the sector capturing 10% of total CRE activity according to KPMG's Property Lending Barometer 2025⁷, it reflects allocators rotating into jurisdictions where yield spreads over Western European gateway markets exceed 200 basis points.

Yet these spreads must be stress-tested against our Liquidity Stress Delta (LSD), which models transaction timeline elongation and bid-ask spread widening during macro shocks. For institutional allocators, the strategic question is not whether cross-border yield spreads exist, but whether they compensate adequately for the embedded risks that BMRI and LSD quantify.

When PwC's US Hospitality Directions⁸ notes that bid-ask spreads remain wide compared to 24 months ago, it signals that domestic pricing discipline has returned, even as offshore markets offer headline yields that appear structurally attractive. The arbitrage opportunity lies in identifying jurisdictions where yield spreads exceed BMRI-adjusted risk premiums by at least 150 basis points, creating a margin of safety for patient capital willing to navigate regulatory complexity and currency hedging costs. As Edward Chancellor notes in Capital Returns, "The greatest opportunities for excess returns arise when capital is scarce and competition limited," a condition that increasingly characterizes select APAC and CEE markets where institutional capital remains underdeployed despite operational recovery.

REIT Capital Rotation: Exploiting 300bps Valuation Gaps Between Private and Public Markets

Chatham Lodging Trust's Q1 2025 asset sales, five select-service properties for aggregate proceeds of $92 million at a 6.5% cap rate on LTM NOI according to Data Insights Market's CLDT analysis⁹, exemplify a broader capital allocation discipline taking hold across public hotel REITs. Simultaneously deploying $25 million into share buybacks at valuations approximating $150,000 per key and a 9.5% cap rate on forecasted 2025 NOI, CHL is executing textbook arbitrage: selling operational assets at compressed cap rates while repurchasing equity at implied cap rates 300 basis points wider.

This isn't financial engineering, it's recognition that market structure inefficiency has created a material gap between private transaction pricing and public equity valuations, one our Liquidity Stress Delta (LSD) framework quantifies as a persistent dislocation rather than transient volatility. As William Thorndike notes in The Outsiders, "The best CEOs were capital allocators first, operators second." This principle resonates across the current REIT landscape, where Host Hotels & Resorts confronts 10-year Treasury yields at 4.2% and Fed funds at 5.25-5.50%, per Porter's Five Forces Host Hotels SWOT Analysis¹⁰, compressing acquisition spreads and elevating refinancing risk.

When higher-for-longer rates push hotel cap rates upward while simultaneously depressing REIT equity valuations, the strategic response bifurcates: dispose of non-core assets into strong private capital demand, then redeploy proceeds into undervalued equity or deleveraging. Our Bay Adjusted Sharpe (BAS) improves materially in this scenario because the risk-adjusted return on buybacks exceeds the NOI yield foregone through asset sales, particularly when the public vehicle trades at 35-40% discounts to net asset value.

The capital cycle dynamics Edward Chancellor describes in Capital Returns are playing out in real time. When transaction volumes concentrate in select segments, trophy assets and select-service hotels in gateway markets, secondary stock becomes stranded despite comparable operational quality. Yet this creates tactical opportunities for allocators who recognize the dislocation. KPMG's 2025 Property Lending Barometer notes that hotel sector investment share reached 10% of total CEE real estate volume in 2024, reflecting revived tourism demand¹¹. When private capital flows into hospitality assets while public REITs trade at severe NAV discounts, the arbitrage isn't between geographies, it's between ownership structures.

For sophisticated LPs evaluating 2025 hospitality allocations, the strategic question isn't whether hotel fundamentals justify current private pricing (RevPAR recovery, supply discipline, and inflation-hedging characteristics suggest they do). Rather, it's whether to access exposure through direct asset acquisition, REIT equity at depressed multiples, or structured vehicles that can exploit the valuation gap. Our Bay Macro Risk Index (BMRI) suggests the optimal path varies by jurisdiction, U.S. gateway markets face minimal sovereign risk adjustments, while emerging hospitality markets require 200-400bps IRR haircuts. When public REITs execute disciplined capital rotation at compressed cap rates while their equity trades at 9.5% implied yields, they're not signaling distress, they're exploiting market structure inefficiency that patient capital can monetize.

Implications for Allocators

The convergence of three structural dynamics, 315bps cross-border yield spreads, $13.3 billion APAC investment surge, and 300bps public-private valuation gaps, crystallizes a compelling thesis for institutional capital deployment in Q4 2025 and beyond. Geographic arbitrage opportunities have reached levels historically associated with emerging market dislocations, yet are now present across developed gateway markets where currency hedging costs and regulatory friction remain manageable. For allocators with multi-year deployment horizons and capacity to navigate cross-border complexity, the net yield pickup of 250bps after hedging costs represents a structural mispricing that patient capital can exploit before mega-fund flows compress spreads in 2026.

Strategic positioning should balance three vectors simultaneously. First, direct cross-border asset acquisition in jurisdictions where yield spreads exceed BMRI-adjusted risk premiums by at least 150 basis points, targeting APAC leasehold structures and CEE gateway markets where institutional capital remains underdeployed despite operational recovery. Second, public REIT equity exposure at 35-40% NAV discounts, particularly vehicles executing disciplined capital rotation by disposing assets at 6.5% cap rates while repurchasing equity at 9.5% implied yields. Third, structured vehicles that can exploit the valuation gap between private transaction pricing and public equity markets, capturing the 300bps arbitrage that BAS frameworks identify as superior risk-adjusted returns.

Risk monitoring should focus on four critical variables: treasury yield trajectories and their impact on cap rate normalization timelines, cross-border capital velocity as measured by transaction volume trends in APAC and CEE markets, public REIT NAV discount persistence versus mean reversion, and LSD metrics tracking bid-ask spread behavior during macro volatility episodes. When Blackstone signals bullish 2026 positioning with borrowing costs down 40% from 2023 peaks, it typically precedes institutional capital acceleration that compresses arbitrage opportunities. The window for exploiting current geographic and structural mispricings may narrow materially over the next 12-18 months as private capital flows normalize and public equity valuations re-rate toward private transaction comparables.

— A perspective from Bay Street Hospitality

William Huston, General Partner