Where We Stand: California’s Hotel Market at Mid-Year, and What Comes Next

By Erik Ransdell and Mike Annunziata

Strands Realty Group

July 8th, 2025

We’ve officially hit the halfway point in the year, and 2025 is shaping up to be one of the most challenging and consequential years we’ve seen in California hospitality real estate in a long time.

Owners across the state have spent the first six months of the year reacting to rising labor costs, stalled developments, interest rate whiplash, and in Los Angeles, a labor ordinance that could fundamentally reshape hotel economics if it goes into effect. At the same time, there are reasons for optimism. Performance has held steady in most key markets. Select-service and extended-stay assets continue to show resilience. And a growing number of investors are preparing to reenter the market in the second half of the year.

This mid-year newsletter focuses on two main themes that are dominating conversations in our industry:

1. The fallout from Los Angeles’ $30 minimum wage ordinance for hotel workers — what’s happened so far, what’s coming next, and how owners and investors are reacting.

2. A statewide and national mid-year update on hotel performance, financing, and transaction activity — with a look at what we expect to see in the second half of 2025.

   
   

The L.A. Wage Ordinance: What It Means for Hotels

In May, the Los Angeles City Council passed an ordinance that would require hotels with 60 or more rooms to pay workers $22.50/hour beginning this month, with that rate increasing annually to $30/hour by 2028. On top of the base wage, the ordinance includes an $8.35/hour health care supplement for workers not offered qualifying benefits.

Owners didn’t take long to respond. Renovation plans were halted. Staffing models were revised. At least one major operator quietly put a stabilized property on the market rather than try to absorb the cost increase. And according to several brokers we’ve spoken with, multiple development sites that were headed for entitlement are now back in holding mode.

According to a story in the Wall Street Journal, one operator said plainly: “This fundamentally breaks the math.” Another told the New York Post that the cost increase meant they'd likely have to either convert their hotel to another use or exit the market entirely. There’s also concern about how these costs will affect the city’s ability to host large events like the 2028 Olympics, which depends heavily on hotel capacity.

In response, the American Hotel & Lodging Association led a ballot initiative effort to overturn the ordinance. Over 140,000 signatures were submitted to the city — well over the threshold needed to suspend implementation and trigger a referendum. The next step is verification by the City Clerk, after which the measure would go to voters, likely in 2026.

For now, the ordinance is effectively paused. But the uncertainty it’s created is already changing behavior. In conversations with lenders and institutional investors, L.A. is now being viewed as a materially riskier market than it was even a year ago. Some have begun underwriting deals with 100 to 150 basis point premiums over cap rates they’d use in San Diego or Orange County.

The Hilton Universal City project — a high-profile expansion tied to the 2028 Olympics — is one of several developments that’s now reportedly under reconsideration. The concern isn’t just labor cost — it’s also the timing. Projects that start now won’t open until after the $25/hour threshold hits in 2026 or 2027, meaning the economics could shift mid-construction.

Performance Metrics Are Mixed, But There’s Stability

From January through June, Los Angeles hotel performance has lagged behind national averages. STR data shows occupancy in the market tracking below 60%, with RevPAR still about 15% lower than 2019 levels when adjusted for inflation. ADR has recovered slightly but remains volatile, especially for full-service assets in unionized environments.

By contrast, markets like San Diego have fared far better. According to Robert Rauch at RAR Hospitality, year-to-date occupancy in San Diego is hovering around 71.5%, with ADR just above $204 and RevPAR at $146. That puts it ahead of statewide averages and gives it one of the healthiest hotel performance profiles in the country.

In San Francisco, the story is more nuanced. The return of convention business has helped shore up occupancy, especially near the Moscone Center, and weekend leisure travel is back in full swing. But rate growth has been limited, and ongoing concerns about crime and business travel have kept some investors cautious.

Statewide, average RevPAR through June is tracking in the low $100s, with occupancy just above 60%. Luxury and upper-upscale hotels continue to outperform, while economy and midscale assets are flat or declining depending on location.

The National View: Hotels Are Holding the Line

Nationally, the U.S. hotel market has shown surprising resilience in the face of rising costs and tighter lending. Through the first half of the year, occupancy is holding steady around 63%, with ADR at $160 and RevPAR near $101. That’s roughly a 2% year-over-year increase, though most of that growth came in Q1, and Q2 was flatter by comparison.

Luxury segments saw RevPAR gains north of 4%, with healthy group and leisure travel driving bookings in key markets. Select-service and extended-stay segments continue to be the most attractive for investors — offering lower operating costs and more stable margins in uncertain times.

Corporate travel has picked up in markets like New York, Chicago, and Washington D.C., and cross-border travel from Canada and Europe is nearing pre-pandemic levels. Travel from Asia is still lagging, though several sources expect a rebound in late 2025 tied to new airline routes and visa policy changes.

Capital Markets: Quiet but Getting Louder

The investment side of the business has been quiet — but things may be starting to change.

In the first quarter, market observers reported more than $4.5 billion in hotel sales nationally, but most of that volume came from a handful of large deals. Q2 was quieter, with fewer trophy assets on the market and many owners still hesitant to sell into a pricing reset.

That said, off-market activity is on the rise, particularly for smaller deals and portfolios under $75 million. Some buyers are focused on value-add opportunities in Sun Belt and secondary markets, while others are looking closely at distressed debt. Several lenders have begun quietly marketing note sales on underperforming hotels in urban cores.

The Fed’s moves have helped. Interest rates began to ease in Q1, and while the pace of cuts has been slower than some hoped, lower rates are starting to bring buyers back into the conversation. More investors are modeling deals again. More lenders are quoting debt, even if spreads are still wide.

According to CBRE’s mid-year sentiment survey, nearly 70% of hotel investors expect conditions to improve in the second half of 2025. About a quarter say they’re already actively pursuing new acquisitions.

In a recent Bloomberg interview, investor Scott Bessent put it this way: “We’re not rushing in blind, but we’re definitely looking at hard assets with real pricing power. Hotels make sense again, especially if you can manage your labor risk.”

What's Coming in the Second Half of the Year

The next six months are shaping up to be pivotal for hospitality real estate — especially in

California. Here are five things we’re watching closely:

1. The Referendum Fight in Los Angeles

If the City Clerk verifies the petition signatures, the wage ordinance will be suspended until the vote. The outcome of that vote will likely set the tone for development and investment in L.A. for years to come. Until then, expect limited new deal activity and cautious underwriting.

2. Capital Deployment Ramps Up

We expect more investors to begin deploying capital in Q3 and Q4 — especially in markets with favorable labor laws and steady RevPAR growth. Select-service, extended-stay, and well-located boutique hotels will continue to lead interest.

3. Repricing Continues

As sellers adjust expectations and financing becomes more accessible, we anticipate a gradual narrowing of the bid-ask spread. Cap rates are expected to compress slightly in markets like San Diego, Austin, and parts of the Southeast.

4. Asset Conversions and Adaptive Reuse

In high-cost urban markets, underperforming hotels may be repositioned into student housing, workforce rentals, or hybrid flex-stay concepts. We’ve seen the first wave of this already in San Francisco and Oakland, and it’s likely to accelerate.

5. Return of Group Travel and Events

As large events and conferences return, markets with major convention centers — including San Francisco, Anaheim, and San Diego — are likely to see performance gains in the back half of the year. This could boost rates and occupancy just in time for the fall travel season.

Final Thoughts

There’s no question that the first half of the year has presented challenges for hotel owners and investors in California — especially in Los Angeles, where the policy environment has taken center stage. But those who stay focused on fundamentals, target the right markets, and manage risk carefully will be well positioned for what’s next.

Occupancy is stabilizing. Financing is loosening up. And in many markets, travel demand is healthy and resilient. As Fed Chair Jerome Powell said recently, “We’ve made considerable progress on inflation... the labor market is cooling gradually, and we’re watching wage dynamics carefully.” That last part matters — especially in a year when labor costs are shaping every major hospitality decision.

At Strands Realty Group, we’re here to help you interpret what’s happening and make the right moves. Whether you’re exploring a sale, hunting for your next acquisition, or just trying to make sense of this shifting landscape, our team is ready.

Let’s talk.

Strands Realty Group | Hospitality Real Estate Advisors www.strandsrealtygroup.com