
By Erik Ransdell and Mike Annunziata
Strands Realty Group
January 29th, 2025
After a difficult 2024, California’s hotel industry is entering 2025 with cautious optimism. Rising interest rates, financial struggles, and a slowdown in new development made last year one of the most challenging in recent memory. However, as economic conditions shift and new trends emerge, industry leaders are looking ahead to what could be a turning point for hospitality across the state.
Many hotel owners spent much of last year dealing with declining occupancy rates, reduced revenue, and rising operational costs. San Francisco, in particular, faced major financial troubles, with several high-profile hotels going back to lenders due to unsustainable debt levels. Across California, new hotel development slowed significantly, and investors took a wait-and-see approach as interest rates and borrowing costs remained high.
Now, in early 2025, some signs point to stabilization. Certain regions, particularly in Southern California, are seeing hotel demand return as corporate travel picks up and leisure travelers continue booking rooms. But for many hotel operators and investors, challenges remain. The next 12 months will be critical in determining whether the state’s hotel market can turn the page on a difficult period or if further struggles lie ahead.
Looking Back: How 2024 Became One of the Toughest Years for California Hotels
California’s hotel industry faced significant financial pressure throughout 2024. According to Alan Reay, president of Atlas Hospitality Group, hotel development hit a 10-year low as rising costs, high interest rates, and limited lending made new projects nearly impossible. Only 35 new hotels opened in the state last year, a 34 percent drop from 2023. “We predict the hotel construction outlook will remain weak in the near term, as investors focus on acquiring existing hotels at discounts to replacement costs,” Reay explained.
Nowhere was the financial strain more visible than in San Francisco, where some of the largest hotel owners walked away from their properties. The delinquency rate for commercial mortgage-backed securities (CMBS) tied to San Francisco hotels skyrocketed to 41.6 percent in mid-2024, up from just 5.7 percent a year earlier. One of the most high-profile examples was Park Hotels & Resorts, which surrendered the Hilton San Francisco Union Square and Parc 55 to its lender, citing concerns over the city’s recovery.
Hotel values in the city also dropped significantly. According to an appraisal cited by The Wall Street Journal, the Club Quarters Hotel at 424 Clay Street was valued at $160.8 million just a few years ago but dropped to $120.4 million by mid-2024. Some experts believe values could decline further as investors reevaluate the risks of operating in San Francisco’s hospitality market.
Many other hotels struggled with declining occupancy. According to hospitality data firm STR, weekend hotel occupancy in San Francisco was 22 percent lower in 2024 compared to 2019, a much sharper decline than the 4 percent drop nationwide. With fewer business travelers and conventions, room rates struggled to recover, making it difficult for hotel operators to cover debt payments.
The financial struggles weren’t limited to San Francisco. Across the state, hotel transactions slowed to a crawl. California recorded just $1.2 billion in hotel sales in 2024, nearly 50 percent lower than the previous year. Northern California saw a 36.9 percent decline, while Southern California was hit even harder, with sales dropping by 53.7 percent.
According to Reay, buyers held off on acquisitions due to high interest rates and economic uncertainty. “We’re in a market where investors are waiting for prices to drop further or for the Federal Reserve to ease rates,” he said. “Until one of those things happens, transactions are going to remain slow.”
What’s Ahead for 2025? Signs of Recovery in Key Markets
Despite last year’s setbacks, there are signs that 2025 could bring improvement. According to a recent CBRE report, the firm has raised its 2025 GDP growth forecast to 2.4 percent, which is above the long-term average of 2.1 percent. A stronger economy could lead to more consumer spending on travel, boosting demand for hotels.
Several hotel markets in California are expected to perform better this year. According to a report from CoStar, four key regions are projected to see revenue per available room (RevPAR) growth between 3 and 4.2 percent:
Oakland
Wine Country (Napa/Sonoma)
Los Angeles
Orange County
These areas are benefiting from a mix of returning business travel, strong leisure demand, and an increase in corporate events. In Los Angeles, for example, several major entertainment and sports events are expected to drive hotel bookings, including the buildup to the 2026 FIFA World Cup.
Interest rates will also play a major role in shaping the hotel investment market this year. In 2024, rates for hotel loans rose to 7–8 percent, compared to 3–4 percent in 2019. Many investors believe the Federal Reserve could begin cutting rates by mid-to-late 2025, which would make financing more accessible and encourage more hotel transactions.
New Hospitality Trends Shaping the Industry
As the industry moves into 2025, hotels are adapting to changing guest preferences. One trend that is gaining traction is the rise of alcohol-free travel experiences. Following a U.S. Surgeon General advisory linking alcohol consumption to cancer risks, many hotels are adjusting their offerings.
According to managers at the Pasea Hotel & Spa in Huntington Beach and the Bardessono Hotel & Spa in Napa Valley, sales of non-alcoholic beverages have been rising, and more guests are requesting alcohol-free cocktail menus. Some hotels are even marketing “dry tripping” packages, which include detox programs, wellness activities, and high-end alcohol-free dining experiences.
Another trend shaping California’s hotel industry is the increase in hotel-to-housing conversions. In cities like San Francisco and Los Angeles, where housing shortages remain a major issue, some investors are repurposing struggling hotels into long-term housing units.
One recent example is The Panoramic, a 160-unit hotel in San Francisco’s SoMa neighborhood that was recently converted into workforce housing. Projects like this are becoming more common, as developers and local governments look for solutions to California’s housing crisis.
How Hotel Owners and Investors Are Positioning for the Future
For hotel owners and investors, the next 12 months will be a critical period to reassess strategies.
Some investors are buying distressed properties at a discount with the belief that values will recover in the coming years. According to Bob Sonnenblick, a Los Angeles-based hotel developer, downturns often present the best buying opportunities. “When people get scared, that’s when we get excited. Some of the best deals we’ve ever done were when nobody else wanted to buy,” he said.
Others are focusing on repositioning existing properties to attract new demand. This could mean investing in renovations, adding high-end amenities, or shifting to extended-stay models that cater to changing travel patterns.
Hotel operators are also placing a greater emphasis on cutting costs and maximizing efficiency. Many hotels are adopting new technology, streamlining operations, and rethinking staffing models to improve profitability.
According to Daniel Lesser, CEO of LW Hospitality Advisors, California’s hotel market has always been cyclical. “There have been downturns before, and there will be downturns again,” he said. “The question is whether you’re positioned to survive and take advantage of the recovery when it comes.”
Final Thoughts: A Market in Transition
While the challenges of 2024 have carried over into 2025, the outlook is showing signs of improvement. Some California hotel markets, including Los Angeles, Orange County, and Wine Country, are expected to see strong demand growth this year.
For hotel owners and investors, this is a time to evaluate opportunities, adapt to new trends, and prepare for long-term success. Whether that means repositioning properties, taking advantage of distressed asset sales, or focusing on operational efficiencies, 2025 is shaping up to be a pivotal year for California’s hospitality industry.
While uncertainty remains, one thing is clear: those who adapt will be best positioned for success when the market fully rebounds.
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