2025 Hotel Market Reset: Navigating the New Normal and Positioning for 2026

Photo: Hotel Del Coronado

By Erik Ransdell and Mike Annunziata Strands Realty Group

December 17th, 2025

Now that we are officially closing out 2025, it is a good time to step back and ask a simple question: what actually happened in the hotel market this year, and what does it mean for 2026 if you own, operate, or invest in hotels in California and across the U.S.? Instead of another year of headlines about “revenge travel” and rapid recovery, 2025 felt like a year where the easy gains were behind us and the real work of managing through a higher‑rate, higher‑cost environment began in earnest. The story was not about boom or bust; it was about a sector learning how to function in a new normal, where demand is healthy but more cautious, financing is available but more selective, and every decision about capital, operations, and strategy matters more than it did a couple of years ago.

2025 in one picture: slower growth, tighter capital

For much of the year, performance looked fine on the surface and more complicated once you looked underneath. National forecasters now expect U.S. occupancy to settle in the low 60s, with modest rate growth and revenue per available room ending roughly flat to slightly down compared with last year. According to CoStar and Tourism Economics, that makes 2025 the first year since the financial crisis and early pandemic period where RevPAR takes a step back instead of forward, even though the broader economy is still expanding.​

On the capital side, borrowing costs stayed in a band that feels high compared with the last cycle. Recent U.S. hotel outlooks point out that growth is running below its long‑term trend while inflation has been harder to tame than expected, and that mix is squeezing hotel margins. Cap‑rate work across commercial property shows only a small pullback from recent highs, and the general view is that hotel yields are closer to a turning point than a new leg up or down. Tracking of larger hotel sales shows that dollar volume in the first half of 2025 fell versus a year earlier and average price per key reset lower as buyers demanded higher going‑in returns and more room for capex in their pricing.​

For brokers and active investors, that combination creates a very specific environment: values have adjusted, sellers are starting to acknowledge the new reality, and buyers with equity and a clear business plan can negotiate from a position of strength. It is not a market where everything trades, but it is a market where well‑packaged stories and realistic pricing get attention.

Operating fundamentals: from rebound to grind

Operationally, 2025 was the year the sector shifted from “snap‑back” to “grind it out.” Updated national forecasts point to a small RevPAR decline for the year, driven by softer occupancy and slower rate growth than originally projected. Weekly and monthly data through the summer and into the fall showed several straight months where occupancy and RevPAR ran below the same period last year, which tells you this was more than just a blip in a few markets.​

Forecasters have been clear on what is driving this: demand is still there, but it is more selective. Rising unemployment, higher everyday costs, and weaker consumer confidence all weighed on discretionary travel, while corporate travel budgets and meeting spend remained under tight control. On the rate side, guests pushed back after a couple of strong years of ADR increases. Analysts tracking hotel profitability now expect gross operating profit to come in below earlier forecasts because wages, insurance and other operating expenses are running faster than room revenue. Recent national research on U.S. hotels reinforces that soft top‑line growth and persistent inflation are likely to keep pressure on margins through 2026, particularly at full‑service properties and in high‑cost labor markets.​

For owners and operators, this is exactly the kind of backdrop where asset management and capital planning matter most. For brokers, it is also the phase where owners start calling to talk about partner buyouts, recapitalizations, and sales, because the rewrite of the business plan is often easier with a new capital stack.

California: big numbers, bigger headwinds

Within that national context, California remains one of the most attractive and most demanding hotel markets in the country. Coastal and gateway areas like Los Angeles, San Diego, Orange County and the Central Coast continue to post some of the strongest ADR and RevPAR figures nationally, helped by leisure travel, events and slowly improving international visitation. End‑of‑year state‑of‑the‑industry work shows these markets at or above 2019 RevPAR in nominal terms, but the road back has relied heavily on pricing power rather than a big surge in occupancy.​

Northern California is still catching up. San Francisco and parts of the Bay Area posted year‑over‑year gains in 2025 but continue to trail other major markets, with weak office usage and a slower return of convention and corporate travel still in the mix. Recent tracking of urban hotel trades indicates that pricing has adjusted in a number of gateway locations as investors reprice risk around office, convention calendars and local policy, opening the door for buyers who are comfortable with a longer hold and a more complex story. Inland and secondary California markets moved with local demand drivers: logistics and warehousing, universities, healthcare and regional tourism. Some of those markets had a solid year; others saw the limits of what rate‑driven recovery can do without stronger underlying demand.​

The common denominator is cost. National hotel research has called out high‑cost states as feeling the squeeze first and hardest. Wage growth, benefit costs and regulatory compliance have taken a bigger bite out of profit in markets like California, and many operators report that margins here are under more pressure than in the country as a whole. Coastal markets also faced insurance and utility costs tied to climate and infrastructure risks that simply do not exist in many interior markets. Even very healthy topline performance can translate into thinner bottom lines unless owners are disciplined on operations and capital improvements. For brokerage and capital, that cost environment pushes some owners toward sale or recapitalization, and rewards experienced buyers who understand how to run hotels in California’s regulatory and operating sandbox.​

Cap rates, values and deal flow: new pricing reality, real opportunity

On values, the big repricing happened over the last couple of years; 2025 was about living with the new numbers. National cap‑rate work shows hotel yields clearly higher than pre‑pandemic lows, with only the beginnings of flattening and, in a few corners of the market, slight compression. Studies that break out cap rates by chain scale put typical 2025 cap rates around the low‑8s for luxury and upper‑upscale, mid‑ to high‑9s for upscale and upper‑midscale, and low double digits for midscale and economy, roughly 100 to 150 basis points above the last cycle for many property types.​

California fits inside that picture with its usual twist. Prime assets in coastal and gateway locations still price at tighter yields than comparable product in less supply‑constrained markets because of long‑term demand and high barriers to entry. At the same time, buyers in 2025 were not shy about demanding compensation for the risks that come with California: operating costs, policy uncertainty, and in many cases, significant capex. Commentary on recent deals notes that investors went into this year underwriting higher capex, higher insurance and higher payroll, and they priced deals accordingly. One national advisor captured the mood well: this is not a demand crisis, it is a cost and capital reset.​

Deal numbers reflect that reset. A widely watched tally of larger single‑asset trades recorded just over 80 hotel deals above ten million dollars in the first quarter of 2025, with volume approaching three billion dollars and average price per key a little north of 200,000 dollars. In the second quarter, the number of trades was essentially flat versus the prior year, while total dollars and average price per key came down, pointing to selective activity at new pricing levels rather than a wave of forced sales. National coverage of sales trends describes a market where buyers and sellers are finally getting closer on price in some situations, but many assets are still on the sidelines—especially where capital‑expenditure needs are heavy or the local story around office or politics is uncertain.​

For California owners and investors, this is a constructive setup. The trades that are happening tend to be in coastal and gateway locations, resorts, and urban assets where price has reset to a level that makes sense given the risk. Owners who accept today’s pricing and bring a clear story to market are finding capital. Buyers with equity and conviction are finding deals that did not exist when rates were lower and values were stretched.​

Debt and supply: why timing matters in 2026

On the lending side, 2025 was a year where capital was available, but the bar to clear was higher. Banks stayed focused on strong sponsors, stabilized or near‑stabilized properties, and primary markets, often with lower leverage and tighter coverage requirements than in the last cycle. Private credit and debt funds continued to fill the gap for acquisitions, recapitalizations and value‑add deals, trading flexibility and speed for higher rates and more active involvement in the business plan. Observers of financing trends have noted that many of the deals that closed this year used non‑bank capital or structured solutions because large balance‑sheet lenders remain careful on hospitality exposure.​

At the same time, new supply is not racing to catch up. Most national hotel outlooks stress that ground‑up development has slowed sharply, as construction costs, entitlement risk and higher financing costs make many new projects hard to pencil at today’s achievable ADR. In California, where land and approvals are expensive even in good times, that effect is even more pronounced. Older and underperforming assets are being repurposed into housing and other uses in several cities, shrinking the lower end of the room inventory. For assets that remain hotels, especially in coastal and experiential markets, the more common play is repositioning: new flags, moving up chain scale, strengthening amenities and tightening revenue strategy in markets where new rooms will be scarce.​

For owners and investors who think in cycles, this is exactly the kind of supply backdrop you want to be buying into. As one forecasting team put it recently, the industry has moved from recovery to normalization; the opportunity now is less about how many new rooms you can build and more about how well you own and operate the rooms that already exist.​

The 2026 window, and how to use it

Looking into 2026, the base case most forecasters see is modest improvement, not a dramatic rebound. Growth is expected to stay below long‑run averages, inflation likely stays somewhat elevated, and RevPAR gains will have to be earned, not assumed. The good news is that new supply is limited and the big cap‑rate reset is largely behind the sector. As owners and buyers finally get closer on pricing, and as some of the “extend and pretend” decisions from the last couple of years come back around in the form of maturities and capex needs, more opportunities will shake loose.​

For owners, the next 12 to 24 months will be about getting ahead of debt maturities, being honest about capex and competitive position, and deciding which assets to double down on and which to move on from. For investors, it will be about targeting situations where short‑term noise hides long‑term value—particularly in California’s coastal and experiential markets and in select urban locations where pricing has already adjusted. For lenders and capital partners, it will be about picking the right sponsors and markets, structuring deals that protect downside, and staying close to the real operating story on the ground.​

The last two times the industry posted a full‑year RevPAR decline—2009 and 2020—ended up being the start of new investment cycles for those willing to act with realistic assumptions and patient capital. This year’s pullback is much milder, but the lesson is similar. As 2026 begins, California and the broader U.S. hotel market are moving into a phase where fundamentals, pricing and capital are finally starting to align.​

From our side, we are looking forward to helping clients use this window, whether that means a sale, a purchase, a recapitalization, or just a fresh look at the options. Happy holidays from all of us, and thank you for your trust and conversations throughout 2025. We look forward to working with you in 2026—please do not hesitate to reach out over the holidays if you want to talk through a specific asset, market, or idea.