The U.S. hospitality sector enters 2025 facing its first RevPAR decline since the pandemic, with cost inflation outstripping modest revenue gains. Occupancy is forecast at 62.3% and RevPAR at –0.4% YoY, as labor and operating expenses compress margins industry-wide. Amid tightening debt terms and subdued construction, operators and lenders are bracing for a flat-to-down year, while selective optimism builds for a 2026 demand rebound linked to events and resumed corporate travel.

Operating costs—led by labor, utilities, and food and beverage—continue to rise at a pace well above ADR growth, which is projected at only +0.8% YoY for 2025. This dynamic has forced a downward revision in gross operating profit (GOP) per room estimates, as expense inflation erodes what little topline growth hotels can capture. “We’re watching every line item—there’s no room for error,” one regional manager noted. By contrast, pre-pandemic profit margins are now out of reach for most urban and full-service hotels. The implication: lenders and equity investors must recalibrate underwriting, stress-testing deals at today's compressed margins and lower anticipated NOI.

Recent weekly data shows U.S. hotel occupancy at 60.9% (–4.1% YoY) and RevPAR down 4.6% YoY for early November, with large markets seeing double-digit occupancy declines due to tough comps and calendar shifts. Even after adjusting for Veterans Day timing, demand remains soft, especially for group and business travel segments. Leisure demand, the previous recovery driver, is normalizing, exposing the fragility of midweek and urban hotel performance. Ultimately, sustained recovery for full-service assets hinges on a meaningful return of corporate and event-driven travel.

Hotel cap rates have widened to the 8–9% range for select-service assets—up from 6–7% pre-2023—reflecting higher risk premiums and costlier debt versus other CRE sectors. Lenders have responded by tightening underwriting standards, trimming LTVs, and demanding interest reserves on new loans. Debt spreads on hotel loans are now 25–50 bps above multifamily equivalents. Equity capital is still present, eyeing potential 2026 upside, but demands price concessions and rigorous due diligence given thinner coverage ratios and rising PIP obligations. On balance, construction financing remains scarce, except in niche subtypes like extended stay.

While the 2026 hotel forecast was trimmed (occupancy –0.3 ppt, ADR –0.1 ppt), the sector could benefit from marquee events (notably the 2026 World Cup) and a return of international travelers, especially from Asia-Pacific. New hotel supply remains constrained, setting the stage for occupancy and ADR improvement if demand materializes. However, any rebound is conditional: a tepid macro backdrop or slower visa processing could delay recovery. Operators are using the present lull to renovate, adopt tech-driven efficiencies, and reposition assets in anticipation of a cyclical upturn.

For 2025, flat is the new up: operators and capital must price in current margin realities, higher operating costs, and limited growth. If business and international travel revive by mid-2026, existing assets will benefit from limited new supply and event-driven demand. Still, persistent cost pressure and tight lending will favor disciplined, efficiency-focused operators and well-capitalized buyers.

Margins contract faster than memories expand—discipline, not demand, will define this cycle’s survivors.