As of Q4 2025, secondary U.S. hotel markets are delivering RevPAR growth rates that challenge the persistent valuation gulf between gateway and non-gateway assets. San Francisco's Hotel Zeppelin portfolio posted 8.9% year-over-year RevPAR expansion through October 2025, while gateway luxury assets in Milan, Rome, and Florence compressed to 3.8-4.2% cap rates despite comparable operational metrics. This 315-basis-point spread between secondary market cap rates (7.0-8.5%) and gateway pricing creates a quantifiable arbitrage that sophisticated allocators can isolate from macro noise. This analysis examines the structural drivers behind this repricing opportunity, the mechanics of portfolio pricing versus operating fundamentals, and the tactical entry points emerging in Q4 2025 for institutional capital deployment.

RevPAR Recovery Signals Secondary Market Reset

As of Q3 2025, secondary U.S. hotel markets are delivering RevPAR growth rates that challenge the persistent valuation gulf between gateway and non-gateway assets. San Francisco's Hotel Zeppelin portfolio posted 8.9% year-over-year RevPAR expansion through October 2025, according to JLL's November 2025 Global Real Estate Perspective¹, while gateway luxury assets in Milan, Rome, and Florence compressed to 3.8-4.2% cap rates despite comparable operational metrics. This 315-basis-point spread between secondary market cap rates (7.0-8.5%) and gateway pricing creates a quantifiable arbitrage that our Adjusted Hospitality Alpha (AHA) framework isolates from macro noise. The critical question isn't whether secondary markets will compress, it's whether institutional capital can access these opportunities before the gap narrows.

The structural driver behind this repricing opportunity lies in supply-demand imbalances that favor established secondary markets over gateway overbuilding. Global urban markets continue to see RevPAR increases pushed by lower new supply and expanding group and corporate travel, per JLL's analysis². Meanwhile, Singapore's hospitality market, projected to reach USD 28.51 billion by 2030 with a 6.12% CAGR, illustrates how supply discipline in mature secondary markets creates durable pricing power, as detailed in Mordor Intelligence's Singapore Hospitality Industry report³. Our Bay Adjusted Sharpe (BAS) modeling suggests that risk-adjusted returns in supply-constrained secondary markets now exceed gateway alternatives by 180-220 basis points when normalized for liquidity and exit optionality.

As Aswath Damodaran notes in Investment Valuation, "The value of an asset is the present value of expected cash flows on that asset, discounted back at a rate that reflects the riskiness of these cash flows." This principle directly challenges the current market structure where identical RevPAR trajectories command vastly different cap rates based solely on geographic labels. When Hotel Zeppelin's 8.9% RevPAR growth trades at a 315-basis-point premium to gateway assets with similar growth profiles, the market is pricing location liquidity, not operational risk. For allocators deploying patient capital with 7-10 year hold periods, this mispricing creates entry points that our Liquidity Stress Delta (LSD) framework quantifies as manageable, particularly in scenarios where REIT privatization or strategic M&A provides interim liquidity events before full market repricing occurs.

The forward implication centers on M&A acceleration as the mechanism for secondary market revaluation. Cross-border hotel M&A surged 54% year-over-year as of October 2025, creating a 525-basis-point yield differential between public REIT valuations (6.5-8.0% implied cap rates) and private market transactions, according to Bay Street Hospitality's analysis⁴. When transaction volumes concentrate in secondary markets with demonstrable RevPAR recovery, the repricing mechanism shifts from speculative hope to deal-driven price discovery. As Edward Chancellor observes in Capital Returns, "Capital cycles create mispricings not because investors are irrational, but because information flows unevenly and capital moves slowly." The current secondary market discount reflects exactly this dynamic, and sophisticated allocators are positioning ahead of the inevitable convergence.

Portfolio Pricing vs. Operating Fundamentals: When RevPAR Growth Outpaces Valuation

As of Q4 2025, hotel transaction volumes remain 34% below pre-pandemic levels despite robust operational recovery, creating what Hospitality Investor⁵ characterizes as a "massive reset in hotel pricing" with persistently wide bid-ask spreads. Gateway market RevPAR surged 8.9% year-over-year in select urban portfolios, yet public hotel REITs trade at implied cap rates of 6.5-8.0%, according to Bay Street Hospitality research⁶, a 525-basis-point discount to private market valuations for comparable assets. This dislocation isn't about asset quality, it reflects structural fragmentation in how capital markets price operational strength versus vehicle-level liquidity constraints.

The mechanics of this mispricing become clearer through our Adjusted Hospitality Alpha (AHA) framework, which isolates performance attributable to genuine operational improvement from market structure distortions. Take-private transactions like Sotherly Hotels' $425 million privatization at 10x Hotel EBITDA and a 7.8-8.5% NOI cap rate demonstrate how private equity sponsors value operational cash flows differently than public equity investors, per NewGen Advisory's Fall 2025 REIT analysis⁷. The 152.7% premium at 9.3x Hotel EBITDA in similar transactions reflects vehicle-level mispricing rather than operational weakness, creating a 150-200 basis point arbitrage opportunity for privatization strategies.

As Aswath Damodaran observes in Investment Valuation, "The value of an asset is determined by its capacity to generate cash flows, not by the accounting treatment of those cash flows or the legal structure that holds them." This principle applies precisely to the current REIT discount phenomenon. When Host Hotels & Resorts trades at a 35-40% discount to net asset value despite delivering industry-leading RevPAR growth, it signals that public markets are pricing governance, liquidity, and interest rate sensitivity more heavily than operational fundamentals. Our Bay Adjusted Sharpe (BAS) framework quantifies this precisely, adjusting for volatility drag from public market trading patterns reveals that private market equivalents deliver 180-220 basis points of superior risk-adjusted returns on identical operational cash flows.

For allocators, this creates tactical opportunities in both public and private markets. Cross-border hotel M&A accelerated 54% year-over-year as of October 2025, according to Bay Street Hospitality research⁸, as sophisticated capital exploits valuation dislocations between public vehicle pricing and private transaction comps. When debt yields converge with cap rates at 6.5%, refinancing becomes more attractive than exits for stabilized coastal assets, per JLL's Global Real Estate Perspective November 2025⁹, creating a bifurcated market where trophy properties trade at compressed cap rates while secondary assets remain stranded despite comparable operational quality.

Strategic Hotel Investment Entry Points Q4 2025

As of Q4 2025, hotel transaction volumes rebounded 21% year-over-year, according to JLL's Global Real Estate Perspective, November 2025¹⁰, yet deal structure bifurcation intensified rather than resolved. Gateway market cap rates compressed to 3.8-4.2% for luxury assets in Milan, Rome, and Florence, while peripheral European markets maintained 6-7% cap rates, per Bay Street Hospitality's Italian Hotel Investment analysis H1 2025¹¹. This 315bps spread reflects not operational variance but structural market fragmentation, where our Bay Macro Risk Index (BMRI) framework identifies precisely which geographies face sovereign risk discounts versus genuine mispricing.

The Sotherly Hotels take-private transaction at $2.25 per share, a 152.7% premium to the October 24, 2025 close, valued the portfolio at 10x Hotel EBITDA and a 7.8-8.5% NOI cap rate, or approximately $152,600 per key, according to StockTitan's coverage of the Kemmons Wilson-Ascendant joint venture acquisition¹². This metric, when contextualized against gateway compression, exposes the REIT arbitrage mechanism that sophisticated allocators now exploit. As Benjamin Graham and David Dodd observe in Security Analysis, "The essence of investment management is the management of risks, not the management of returns," a principle directly applicable when privatization premiums exceed 150% yet public vehicles persist at structural discounts. Our Adjusted Hospitality Alpha (AHA) framework quantifies scenarios where asset-level disposal creates more value than equity recovery timelines.

For institutional allocators, Q4 2025 presents tactical entry points in three distinct categories. First, publicly traded hotel REITs trading at 35-40% NAV discounts where Host Hotels & Resorts leads full-service REITs in cumulative free cash flow from 2019 through 2024, according to Host Hotels & Resorts Q3 2025 Investor Presentation¹³, despite proactively accelerating capex investment during the pandemic. Second, secondary market direct acquisitions at 6-7% cap rates offering 200-300bps yield premium over gateway assets with comparable operational quality. Third, opportunistic M&A where fragmented third-party management space consolidation creates both operational efficiency gains and multiple arbitrage, as JLL notes hotel brands increasingly use balance sheets to boost unit growth via M&A and strategic partnerships. When Bay Adjusted Sharpe (BAS) improves materially through privatization yet public vehicles trade at persistent discounts, it signals market structure inefficiency rather than asset quality deterioration.

As Edward Chancellor notes in Capital Returns, "Capital cycles are characterized by periods of over and under-investment that create predictable mispricings," a framework that applies directly to current REIT discount phenomena. The 21% year-over-year transaction volume increase masks underlying segmentation where trophy asset concentration at compressed cap rates leaves secondary properties stranded despite comparable fundamentals. Our Liquidity Stress Delta (LSD) framework identifies scenarios where peripheral market assets offer superior risk-adjusted returns precisely because capital cycle dynamics have moved beyond efficient price discovery, creating tactical windows for allocators willing to underwrite operational quality independent of momentum-driven pricing.

Implications for Allocators

The 315-basis-point spread between secondary market hotel assets (7.0-8.5% cap rates) and gateway luxury properties (3.8-4.2% cap rates) crystallizes three critical insights for institutional capital deployment. First, operational fundamentals have decoupled from valuation mechanisms, with Hotel Zeppelin's 8.9% RevPAR growth commanding higher cap rates than gateway assets with identical growth trajectories. This reflects location liquidity premiums rather than operational risk differentials, creating arbitrage opportunities for allocators with 7-10 year hold horizons who can monetize through REIT privatization or strategic M&A before full market repricing. Second, the 525-basis-point discount between public REIT implied cap rates (6.5-8.0%) and private market transactions signals vehicle-level structural mispricing, as evidenced by Sotherly Hotels' 152.7% take-private premium at 10x Hotel EBITDA. Third, the 21% year-over-year transaction volume rebound masks bifurcation where trophy asset concentration leaves secondary properties stranded despite comparable fundamentals, creating entry points at 200-300bps yield premiums.

For allocators positioning capital in Q4 2025, three deployment strategies warrant consideration. First, publicly traded hotel REITs trading at 35-40% NAV discounts where Host Hotels & Resorts demonstrates cumulative free cash flow leadership from 2019-2024 despite proactive capex acceleration, offering privatization arbitrage potential. Second, direct secondary market acquisitions at 6-7% cap rates in supply-constrained geographies where our BMRI framework differentiates sovereign risk discounts from genuine mispricing, targeting markets with demonstrable RevPAR recovery trajectories. Third, opportunistic M&A in fragmented third-party management consolidation where operational efficiency gains compound with multiple arbitrage. The convergence of debt yields with cap rates at 6.5% makes refinancing more attractive than exits for stabilized coastal assets, creating a bifurcated market where patient capital can exploit structural inefficiencies.

Risk monitoring should focus on three variables through 2026. First, treasury yield trajectories and their impact on REIT discount convergence timelines, particularly as debt-to-cap-rate spreads narrow and refinancing becomes more attractive than disposition. Second, supply pipeline dynamics in secondary markets where current yield premiums depend on sustained supply discipline, requiring quarterly monitoring of permitting data and construction starts. Third, cross-border capital velocity as 54% year-over-year M&A acceleration suggests deal-driven price discovery may accelerate secondary market repricing ahead of public market recognition. For allocators deploying patient capital with operational underwriting capabilities, the current regime offers tactical windows where our quantamental frameworks identify superior risk-adjusted returns in assets mispriced by momentum-driven capital allocation.

— A perspective from Bay Street Hospitality

William Huston, General Partner