Q4 2025 – correction, divergence, and the quiet fight for survival.
The post-pandemic boom has faded into realism. After two years of pent-up travel demand and record rates, the U.S. hotel industry is entering a new phase defined by slower growth, higher costs, and shrinking margins. The end of Q3 2025 marks a clear turning point: performance is flattening, expenses are rising, and the easy wins are gone.
Through Q3, national occupancy averages 66%, down about 1.5% year-over-year. Average daily rate (ADR) increased 0.6%, but inflation erased those gains. Revenue per available room (RevPAR) is slightly negative at -0.3%. Adjusted for inflation, RevPAR is still 6% below 2019 levels, showing that the recovery has stalled in real terms. The industry’s headline growth masks underlying erosion.
Luxury and upper-upscale properties continue to lead performance, posting RevPAR gains of 2–3% year-to-date. Their strong brand equity, global reach, and loyal customer bases have preserved rate power. Midscale and economy hotels tell a different story, with RevPAR declines of 2–3% as cost-sensitive travelers pull back or shift to cheaper lodging. Drive-to leisure destinations that thrived during the pandemic Las Vegas, New Orleans, and Nashville are softening. Las Vegas is pacing 12.8% down for Q4, and New Orleans 16.5% down. Even New York City, historically resilient, is pacing 4% lower. San Francisco stands out as an exception, with Q4 rates up nearly 19% year-over-year as it rebounds from years of underperformance.
Short-term rentals (STRs) have become a structural force, not a temporary disruption. STRs now represent roughly 15% of total U.S. lodging demand, up from 10% in 2019. Demand for short-term rentals has grown 5% this year, while hotel demand declined slightly. The shift reflects a long-term realignment in consumer behavior toward flexibility, perceived value, and local authenticity.
Labor remains the most significant operational challenge. Minimum wages in key markets continue to climb California sits near $20 an hour, Los Angeles will soon reach $25–30, and New York’s Safe Hotels Act will cut non-union margins by up to 500 basis points. Deferred maintenance is becoming urgent as aging properties face unavoidable CapEx. Lenders are growing impatient with owners who rely on extensions instead of reinvestment. The era of leniency is ending.
Operating costs are rising across every category insurance, utilities, property taxes, and employee benefits. Profit margins that once hovered near 30% have compressed into the low 20s. For some full-service hotels, single-digit gross operating profits are becoming normal. The industry has not experienced this level of financial compression since the 2008–2009 recession.
Looking ahead, several trends will define Q4 2025 and 2026:
- Rate resistance. Guests are increasingly unwilling to pay higher rates. Operators must balance occupancy with pricing discipline and use dynamic strategies to maintain market share.
- Corporate transient slowdown. While group demand remains healthy, transient business travel is leveling off. Without a balanced mix, ADR growth will continue to soften.
- Political and economic volatility. The 2026 election cycle, tariff uncertainty, and global trade tensions will likely influence investor sentiment and delay new projects.
- Capital expenditures. Deferred property improvement plans (PIPs) will return in force. Owners who act early and strategically will outperform competitors relying on dated assets.
- Investment reset. Transaction volume should increase by mid-2026 as lenders clear distressed debt and valuations stabilize, opening opportunities for equity-backed buyers.
- Labor automation and technology. Automation will expand across front- and back-of-house operations, balancing efficiency with guest experience. Human service will become more specialized and higher-value.
- Brand differentiation. Over-saturation of traditional flags and soft brands is diluting impact. Independents and boutique operators that deliver authentic design and narrative cohesion will capture market share.
- Data-driven accountability. Investors are demanding stronger asset management, transparent benchmarking, and clear performance metrics.
- Sustainability as a profit driver. Environmental, social, and governance (ESG) factors are now financial imperatives. Energy efficiency, wellness design, and operational resilience directly affect NOI and valuation.
The outlook for 2026 is cautious but not catastrophic. RevPAR is projected to grow roughly 1%, driven primarily by ADR rather than occupancy. GDP growth will stay below long-term averages, and consumer spending will remain conservative. New hotel construction will continue to slow, limited by financing constraints and high build costs. This restrained supply growth could support rate stability and long-term margin recovery.
For investors and operators, 2026 will be a year to reset, strengthening balance sheets, upgrading product, and prioritizing people. Service quality, emotional intelligence, and authenticity will differentiate winners from survivors. In an environment where every guest counts, brands that build genuine human connection will outperform those that rely on scale alone.
Hospitality’s future depends on creating demand, not chasing it. The industry must return to its roots offering belonging, not just beds. In an age of over-choice and under-connection, hotels that make people feel understood will define the next era of travel.
Have your people call my people.
Longing for Belonging™
