New economic policies and tighter immigration rules could shake up the U.S. hospitality market this year after it started 2025 on a solid footing, according to a Marcus & Millichap hospitality investment outlook.
Import taxes could raise prices for producers and consumers. At the same time, immigration policy could dissuade voluntary migration by non-U.S. workers, who make up as much as one-third of the demand in the accommodation sector. Meanwhile, other geopolitical tensions could impact the hospitality industry, which is still grappling with pre-pandemic challenges.
Marcus & Millichap noted the U.S. hotel sector started the year as the country faced an inflection point driven by inflation, a softening labor market, and general economic uncertainty. These factors lower consumer and corporate confidence, adversely impacting domestic leisure and business travel.
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Hotel construction activity is on the rise, with developers expected to add more than 100,000 keys to inventory this year for the first time since 2021, said the report. Luxury, upper-scale and upscale hotels may benefit from occupancy gains, as higher-earning households continue traveling. However, declining occupancy at economy and midscale properties that began last year may continue throughout the next several months.
Select and full-service establishments may benefit from group travel this year, as the number of conventions scheduled in 2025 is similar to pre-pandemic levels, according to the report.
Economic factors, including interest rate uncertainty and fluctuating bond yields, cloud the outlook for longer-term borrowing costs. However, capital is available to finance hotel transactions, though credit standards remain high. Investors are favoring limited-service establishments and leisure destination properties, while hotels in major downtown areas are receiving more scrutiny.
Higher insurance costs, inflation, property tax expenses, and property improvement plan (PIP) requirements could all create challenges in the capital markets.
Local and regional banks remain the most active lenders in the hospitality space, although the share of CMBS financing in the sector increased notably last year, said the report.
Marcus & Millichap said interest rate cuts during the second half of last year helped push sales volumes higher. Private investors made up the largest share and supported a relatively consistent deal flow of properties under $10 million. Institutions and equity funds accounted for the lowest portion of sales volume on record.
The CRE firm predicted that in the wake of policy moves that could hinder international travel, investors may expand their list of targeted metros for hospitality deals.
“Smaller coastal metros, along with major inland Sun Belt markets set to receive standout in-migration, could gain in appeal,” Marcus said.
“Meanwhile, the backlog of approved but stalled hotel projects that may materialize in the near future — given elevated borrowing and construction costs — could create opportunities for investors with construction experience to acquire land approved for new rooms.”
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Kristen Smithberg
Kristen Smithberg is a Colorado-based freelance writer who covers commercial real estate, insurance, benefits and retirement topics for BenefitsPRO and other industry publications.
