The U.S. hospitality sector has recovered from the pandemic in recent years. Since COVID-19 safety measures were lifted, hotels have generated impressive growth rates as travel has roared back worldwide.
As of 2023, the United States had over 5 million hotel rooms. The U.S. hotel industry is one of the largest in the world, with a wide range of accommodations, from budget motels to luxury resorts. The U.S. has over 55,900 lodging properties, including over 33,000 small business properties, with an average room rate of $120.01. However, many high-end properties have been boosting their daily rates in recent years. The number of U.S. hotels with an average daily rate of $1,000-plus in 2024’s half was 80, compared with 22 just five years ago, according to CoStar Group.
PwC predicts that demand growth will be somewhat sluggish in 2025’s first quarter, but it should rebound in the rest of the year, leading to an occupancy of 62.9%. The occupancy is the same as in 2024 and slightly lower than 2023’s 63%. Nevertheless, it represents a robust rebound from the pandemic when occupancy was 43.9% in 2020.
In June 2024, the volume of U.S. hotel rooms under construction reached its highest level in 16 months, according to CoStar data, with 157,713 rooms under construction. That represented a 5.5% increase from a year earlier. CoStar noted that upscale and upper midscale continue to dominate, with 50% of all rooms in the final phase of the pipeline; the pace of activity in these segments has slowed compared to last year.
Midscale and economy demonstrated the lion’s share of the growth, up 42% and 34%, respectively, with newer brands and extended-stay accounting for most of the new construction across the midscale segment. However, in August 2024, Kelsey Fenerty, STR’s manager of analytics, stated that new hotel supply is low “to the benefit of existing hotels,” and the country is not oversupplied. In 1987, there were 80 people in the U.S. per hotel room; in June 2024, that number was 60, Fenerty explained.
Another high-performing sector is extended stay. Extended stay hotel demand was robust from consumers and developers, according to speakers at the Lodging Conference. Jason Ballard, head of operations for Hyatt Studios, said extended stay continues to “be the darling of the hospitality industry.” His company has 4,000 rooms in the pipeline.
Across brands, extended stay leads in new construction so far this year, according to Lodging Econometrics. The firm reports that extended stay brands accounted for 37% of the projects under construction in 2024’s first quarter. Extended stay also comprises 41% of projects scheduled to begin within the next 12 months and 39% of projects in the early planning stage in the quarter.
Financial Industry Performance
In 2023, revenue per available room (RevPAR) rose 3.2% year-over-year, boosted by a 2.7% annual uptick in average daily rates (ADR) and a 0.5% year-over-year increase in occupancy, according to CBRE data. The majority of RevPAR growth occurred in the first half of 2023. The first few years after the pandemic, economy and midscale hotels reported the strongest growth. However, in 2023, these sectors reported slower growth, while luxury hotels, which had been lagging, posted strong RevPAR 4.6% year-over-year growth.
Despite the headwinds from subdued summer demand and a sluggish third quarter of 2024, U.S. hotel performance should reaccelerate in the fourth quarter and extend into 2025, according to CBRE’s latest forecast. Thefirm now projects a 0.5% increase in RevPAR growth for 2024, down from the estimated 1.2% in August. The trend of higher-end hotel outperformance will continue in 2025, with luxury and upper-upscale RevPAR expected to increase by 3.8% for the year and 3.7% for the year, respectively, according to CBRE.
CBRE also reports that hotels in major U.S. cities will experience the strongest RevPAR growth in 2024 due to the continued recovery of inbound international travel, strength in the group’s segment, and modest improvement in traditional corporate travel. A boost from the recovery in international tourism could also provide a substantial boost, lifting occupancy by about 1.1 percentage points year-over-year, which would be close to an all-time high.
With robust RevPAR growth, industry experts report higher hotel profits in 2025.
2025 Predictions
PwC states that “muted supply and growth demand” will lead to 1.3% growth in ADR for 2024, in line with moderate inflation, and RevPAR will expand 1.5% in 2025.
PwC has a few caveats about hotel industry performance in 2024 and 2025. The firm expects revenue growth to be muted, primarily due to slowing consumer spending and GDP growth, projected to increase by an annual average of 2.7% and 2.1% in 2024 and 2025, respectively. PwC noted that risks to their predictions include “the pace of changes in the macroeconomic environment, the pace of rate cuts and evolution of monetary policy.”
PwC’s outlook may also shift as the current political and economic uncertainty landscape is clarified in January after the new administration takes office. The new administration’s policies for immigration, travel patterns and restrictions, and tariffs, among others, may significantly impact the sector.
The Impact of Rising Interest Rates on Hotel Property Values
In the past two years, hotels have been coping with rising interest rates, which can place pressure on hotel property values. Hotels can pass on some of these costs to guests, and that can mean a stabilization in property values. Hospitality real estate is resilient, but refinancing may be more expensive over the next few years, causing some properties to sell at lower-than-expected values.
Projections for Investment in the Hospitality Sector
In late 2024, JLL’s Hotels & Hospitality Group released their Global Hotel Investor Sentiment Survey, demonstrating improved optimism in the hotel investment sector. As a result of recent interest rate cuts by major central banks, an unprecedented 80% of investors plan to maintain or increase their capital investment in hotels in 2025.
The surge in investor confidence is driving cross-border investments to new heights, with 57% of respondents indicating they want to explore deploying more capital outside their home regions. In fact, 52% of investors surveyed expect to increase their hotel industry allocation relative to other commercial real estate sectors in 2025.
Ninety-five percent of investors surveyed by JLL expect their all-in cost of capital for hotel acquisitions to either remain the same or decrease meaningfully over the next 12 months after the rising cost of capital, namely debt market volatility, was the primary driver behind limited investment activity in 2024.
Urban markets are emerging as prime targets, with several global cities positioned to attract significant investment. In addition, the survey also revealed changes in investor preferences and strategies. Luxury hotels and extended-stay properties gathered substantial interest, while hotel and brand operating companies present attractive opportunities. Additionally, a record number of first-time hotel buyers is impacting the investment landscape.
At the Lodging Conference in October Arash Azarbarzin, Highgate’s CEO, stated,
“The supply has never been so low, [and] new construction has never been so low, so with the interest rate coming into place, I think the investment horizon is going to be very bright for 2025.”
Transaction Volumes
Industry experts predict that approaching loan maturities will impact deal activity. At the Lodging Conference, Dave Pollin, co-founder and president of The Buccini/Pollin Group, stated that there will be “a lot more transactions over the next 18 months.”
Nearly $6 billion worth of U.S. hotel securitized loans were set to be due for repayment at the end of 2024, which should lead to numerous hotel transactions, according to JLL research.
In 2024’s third quarter, transaction volume rose for the third consecutive quarter, buoyed by large transactions. Prominent deals in the quarter included Hyatt’s $1 billion sale of the Hyatt Regency Orlando, Gencom’s $300 million acquisition of Thomson Central Park Hotel and Host Hotels & Resort’s purchase of 1 Hotel Central Park for $265 million.
At the close of the third quarter, 481 deals were transacted, representing $15.4 billion in transaction volume, up about 30% from 2019 but down 20% from 2023.
The top three markets for transaction volume in the quarter were New York City, with $1.6 billion; Orlando with $1.2 billion; and Phoenix, with $1 billion, according to JLL.
In December, MCR, the third largest hotel owner-operator in the U.S., purchased the largest hotel near Chicago O’Hare International Airport for an undisclosed amount. Earlier this month, the company announced a $300 million refinancing for a portfolio of 22 select-service hotels across 14 states. The portfolio includes 2,855 guest rooms in high-growth markets like Texas, Florida, New Mexico and South Carolina, managed by MCR’s in-house operations team.
Also last month, Canadian real estate investment firm Leyad purchased its first New York City property, the 226-room Ink48 Hotel, for $62 million. A joint venture with New York City-based private equity firm Capstone Equities, the transaction represents $275,000 per key. It is one of the lowest closings per key of a renovated hotel in Manhattan in years, according to Leyad.
Labor Issues
The hotel industry has been coping with labor issues in the past year. In October, 600 Hilton employees went on strike in Boston. The workers demanded higher salaries and improved working conditions. In 2024, hotel workers went on strike in many parts of the country. However, U.S. hotels will pay an estimated $123 billion in wages, salaries and other compensation in 2024, 4% higher than in 2023 and a 20% increase from 2019, according to the American Hotel & Lodging Association’s 2024 State of the Hotel Industry report.
A challenge for hotel owners is that workers can obtain higher wages in other industries, and inflation that has erased some of the wage gains.
Conclusion
The outlook for the U.S. hotel industry in 2025 is characterized by cautious optimism, with steady growth anticipated in demand and revenue per available room. Although interest rates are still high and potential economic headwinds loom, the sector has demonstrated resilience, particularly in the luxury and extended-stay segments, which have boosted new construction and attracted significant investment.
The sector had robust deal-making in 2024, with transaction volume rising for the third consecutive quarter, buoyed by large transactions. At the close of 2024’s third quarter, 481 deals were transacted, representing $15.4 billion in transaction volume, up about 30% from 2019 but down 20% from 2023.
The hotel industry has also faced labor issues in the past year, with hotel workers striking in many parts of the country. However, U.S. hotels paid an estimated $123 billion in wages, salaries and other compensation in 2024, a 4% increase from 2023 and a 20% increase from 2019, according to the American Hotel & Lodging Association’s 2024 State of the Hotel Industry report.
As the industry adapts to evolving consumer preferences and macroeconomic conditions, many experts predict that stakeholders can look forward to a vibrant year ahead, marked by strategic transactions and increased investor confidence.
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