The hospitality sector is enjoying renewed interest from investors, with more deals in the pipeline, increased refinancings, and improving transaction volume. While the industry still faces challenges, optimism prevails for modest growth over the next year.
Anticipated Headwinds and Tailwinds to Hospitality Performance
The general consensus is that topline RevPAR will grow modestly through 2025 and into 2026, albeit likely below inflationary levels. On the positive side, demand for both business and leisure travel remains robust or continues to rebound depending on the segment. Leisure travel remains a cornerstone of the new demand mix, although somewhat bumpy in the last four years given the pent-up demand for leisure travel, deficit of international travelers to the US, and reduced spending within the economy and midscale chains due to inflationary pressures and economic uncertainty. A continued return-to-office movement and lower debt costs bode well for commercial travel to increase in both frequency and length of stay. Convention center bookings are strong for 2025/2026 and large-scale events such as the World Cup should drive demand.However, expenses are expected to outpace RevPAR gains, as climate events continue to push insurance rates higher and changes to immigration and trade policy impact the cost of staffing and goods. Although revenues have met or exceeded 2019 levels, total profitability, especially when considering inflation adjustments, remains below the pre-pandemic figures for a number of assets.
While hotel operators and owners are embracing AI and other tech to increase efficiency, they remain focused on human connection with guests as a cornerstone of the industry. AI and innovation can reduce costs by improving scheduling and staffing efficiency; boost overall revenue through rate adjustments or F&B revenues; and free up hoteliers to interact more often with guests. A myriad of other solutions on the horizon will help increase profit and increase connection with guests. Operators who sit on the sidelines and ignore AI will not only decrease the guest experience but leave money on the table.
While the cost of debt remains elevated, tightening spreads and increased availability of debt have and will support transactions and refinancing. Many investors have begun to move off the sidelines and are no longer waiting to get deals done.
Historically, hospitality has not been the darling of real estate investment due to higher perceived risk and volatility. However, hospitality assets offer the ability to combat inflation with daily rate changes. This, along with hospitality’s current performance relative to other asset classes—especially office—has revigorated interest in the hospitality sector over the last two years. As an asset class, hospitality offers both yield and growth, especially given the industry’s desire to continue to innovate, drive revenue in creative ways, and embrace innovation for cost savings. Smart investors have realized there are portions of hospitality that are less risky, such as extended-stay, which has driven somewhat of a hybrid investor pool.
Hot Hospitality Segments 2025
As we look into 2025 and beyond, some specific sectors that are expected to perform well include extended-stay properties, outdoor experiential lodging, boutique and luxury hotels, and branded-residential.Luxury demand remains strong and investor/lending interest in trophy assets or Single Asset Single Borrower (SASB) deals were a bright spot in 2024. Furthermore, the pricing ability within the luxury segment has combated rising costs, supporting an overall strong return.
The outdoor and experiential hospitality segment continues to grow since its relatively recent inception, with increasing institutional investment over the past 5-7 years. Prior to the pandemic, outdoor and experiential hospitality was limited to one-off “glamping” destination ranging from a tent without AC or heat to ultra-luxury, multi-bedroom units. The lack of definition and available data within the segment has resulted in a slow burn of investor interest and increased demand over recent years. Success in outdoor and experiential hospitality requires an understanding of past successes and failures within the segment, the ability to scale and retain a unique customer experience, and access to relevant data. Be sure to work with an experienced advisor in this unique space as data can be limited, seasonality and infrastructure requirements differ from typical hospitality, and barriers-to-entry can widely vary.
Extended-stay remains a targeted investment within the industry, especially given the higher profit margins and investor overlap with segments such as multifamily. Economy extended-stay has led the segment in terms of new developments and large portfolio transactions in recent years. Midscale extended-stay, a segment established within the last few years, is the newest path of growth and fits the niche between traditional extended-stay and economy extended-stay. While construction financing overall remains somewhat constrained, the lower construction costs and overall investment in both economy and midscale extended-stay should support continued pipeline growth. The only question is, will luxury, serviced, extended-stay be next? Or will this demand remain within the growing branded residence segment?
Hotel Construction Pipeline
Projections for new supply growth in 2025 should support stable or growing overall occupancy, while new supply may increase into 2026 or 2027. In the decade prior to COVID, 2010 to 2019, average supply growth was between 1 to 2%. Since the pandemic and even as recently as 2023 and 2024, supply growth was still down by half. New supply is expected to increase in 2025; however, projects under construction remains compressed outside of a few key markets such as Phoenix. Knowing the actual construction pipeline, which projects are financed, and which projects are almost shovel-ready will be an important distinction for investors in the near term. While construction costs and cost of debt can present hurdles, strong projects have been able to obtain financing in recent months.Conclusions
With careful strategy, investors can capitalize on more transactions, new construction, and modest growth over the coming year. Seek out advisors with focused hospitality expertise who can support informed investment decisions with tools like feasibility and market studies. Consider engaging consultants with hotel experience to provide due diligence assessments and risk management services. Augmenting your strategy with a team of highly-qualified experts will ensure you have the data you need to take advantage of the opportunities presented by this growing market.