The American hotel industry: Hotel investment due diligence, analyzing market demand, franchise fees, and profit margins.

Luxury hotel suite living area with floor-to-ceiling city views, modern furnishings.

The American hotel industry is caught in a vice. On one side, revenue growth has stalled — 2025 marked the first full-year RevPAR decline outside of a recession or pandemic since 2009. On the other, costs are surging in ways that fundamentally alter the math of hotel ownership. For investors performing due diligence on hotel acquisitions today, the landscape demands a level of analytical rigor that separates the disciplined from the reckless.

This is no longer a market where rising tides lift all boats. The data tells a story of deepening bifurcation, compressed margins, and a shifting risk calculus that rewards surgical precision in deal selection. What follows is a framework for thinking about hotel investment in 2025 and beyond — grounded in the numbers, informed by the structural forces reshaping hospitality economics.

The demand picture has fractured along income lines

Start with the top line. U.S. hotel RevPAR grew a tepid 1.4% in 2024, driven almost entirely by average daily rate increases of 1.5% against essentially flat occupancy of 63% — still nearly three percentage points below the 2019 benchmark of 65.8%. In real, inflation-adjusted terms, RevPAR remains roughly 6.8% below pre-pandemic levels. The nominal recovery has masked a genuine erosion in purchasing power.

Then 2025 arrived and things got worse. STR's final November revision pegged full-year RevPAR at negative 0.4%, with occupancy declining year-over-year for nine consecutive months through November. The culprits were varied — tariff uncertainty dampening business confidence, government workforce reductions hammering Washington D.C. (RevPAR down 8.5% in Q3), and a normalization of leisure travel that finally caught up with resort and drive-to markets.

But the national averages obscure a more telling story. Luxury hotels posted 3% RevPAR growth in 2025 while economy properties cratered by 4.4%, according to JLL's investment report. This K-shaped divergence reflects a fundamental split in the American consumer: high-income travelers are still spending, still booking suites at $380 average nightly rates in lifestyle properties, while budget-conscious travelers have pulled back sharply. For investors, segment selection has become as consequential as market selection.

The geographic picture is equally uneven. New York City dominated 2024 performance, posting a staggering $301.57 RevPAR in May — a 12.5% year-over-year jump fueled by Airbnb restrictions and robust international demand. San Francisco mounted a surprising comeback, recording weeks with RevPAR gains exceeding 24%. Meanwhile, Houston's Q3 2025 RevPAR plummeted 25.1% on hurricane-comp distortions, and Austin's aggressive supply pipeline continues to dilute pricing power across all segments.

One genuine bright spot for existing owners: new supply growth is historically constrained. CBRE projects hotel supply will expand just 0.8% annually over the next four years — roughly half the long-term average of 1.7%. Elevated construction costs (luxury builds now routinely exceed $1 million per key), tight financing, and labor constraints have throttled the development pipeline. For well-positioned existing assets, this supply discipline creates a structural tailwind that will eventually translate into pricing power — though "eventually" is doing meaningful work in that sentence.

Franchise fees now consume nearly 12% of every room dollar

The economics of brand affiliation have grown increasingly burdensome. According to HVS's franchise fee analysis, the median total cost of a hotel franchise — encompassing royalties, marketing contributions, reservation system charges, and loyalty program fees — now stands at 11.7% to 11.8% of gross room revenue. That figure has been climbing steadily, and in 2024, CBRE reported that franchise-related fees grew 3.5% year-over-year, outpacing the 2.7% growth in rooms revenue.

The fee architectures vary meaningfully by brand family, and understanding them is essential to any acquisition model. Marriott charges royalties of 5.5% to 6% of gross room revenue for select-service brands like Courtyard and Fairfield, plus an additional 2% to 3% of food and beverage revenue for full-service properties. Hilton's Hampton Inn carries a 6% royalty plus a 4% advertising fee — among the highest all-in rates in the industry at 12% to 14% of room revenue. At the opposite end, Choice Hotels and Best Western properties can operate at total franchise costs of 7% to 9%, reflecting their positioning in the economy and midscale segments where rate tolerance for fees is lower.

What frequently surprises first-time hotel investors is the cumulative weight. A Hampton Inn generating $4 million in rooms revenue will remit roughly $480,000 to $560,000 annually in franchise-related fees before a single dollar goes to debt service, property taxes, or the owner's pocket. The brand delivers genuine value through reservation systems, loyalty programs (Hilton Honors alone drives significant direct bookings), and revenue management support. But the cost is real and non-negotiable.

Property Improvement Plans represent another layer of brand-mandated capital expenditure that investors must underwrite with clear eyes. PIP costs have risen more than 30% above pre-COVID levels. A typical select-service renovation now runs $18,000 to $25,000 per key, with cycles every six to seven years for soft renovations and twelve years for hard renovations. The pandemic-era forbearance that allowed owners to defer these mandates has ended decisively. As one JLL executive put it: "There's no more playing nicely in the sandbox."

Brands have responded to the competitive landscape by deploying key money — upfront payments to secure franchise agreements or retain marquee properties at contract renewal. Marriott now attaches key money to roughly 33% of its pipeline deals, while Hilton deploys it on about 9%. This dynamic creates genuine negotiating leverage for owners of well-located assets, but it typically comes with strings: longer contract terms, tighter performance termination rights, and occasionally higher royalty rates.

The margin squeeze is structural, not cyclical

The profit picture for hotel operators has deteriorated for three consecutive years, and the data suggests this compression is more structural than cyclical. CBRE's 2025 Trends report, drawing from a sample of 2,600 U.S. hotels, revealed that expenses above the gross operating profit line grew 4.1% in 2024 while total revenue increased just 2.3%. The result was negative flow-through: for every additional dollar of revenue generated, hotels actually lost four cents of operating profit.

HotStats confirmed the trend, reporting that U.S. GOP margins declined 1.1 percentage points in 2024, making America the only major global hotel market to experience a profit contraction. The national GOP margin settled around 35.4% — well below the 1990s average of 41.8% and even the 2010s average of 35.5%.

Labor is the primary culprit. Payroll now consumes 34.4% of total hotel revenue, up from 31.4% as recently as 2022. The math is stark: hotels are paying 22% more in total compensation than in 2019 while deploying 7.4% fewer labor hours. Average hourly earnings in leisure and hospitality reached $22.53 in January 2025, and 65% of hotels still report unfilled positions. Housekeeping and front desk roles remain chronically understaffed, with the industry's quit rate running 204% above the national average. F&B labor costs surged nearly 15% in 2024 alone, driven by the return of group and banquet business that requires higher-skilled, harder-to-recruit kitchen and service staff.

Select-service hotels continue to deliver the most compelling margin profile, with GOP margins of 40% to 50% — substantially higher than the 25% to 35% typical of full-service properties. Extended-stay assets perform similarly well, benefiting from minimal housekeeping requirements and lower turnover costs. Chatham Lodging Trust, a select-service focused REIT, reported a 40.2% GOP margin in Q4 2025, demonstrating that the model retains structural advantages even in a softening demand environment. For investors, this margin differential is decisive: select-service assets generate more cash flow per revenue dollar while requiring significantly less operational complexity.

Insurance has emerged as an underappreciated margin destroyer. Between 2019 and 2024, insurance costs per hotel key surged an average of 195% across the top 25 U.S. markets, according to CoStar. In 2024 alone, insurance expenses in CBRE's sample rose 17.4%. Coastal markets are particularly exposed — Florida and California properties face renewal increases of 25% to 50%, with some owners reporting premiums that doubled year-over-year. DiamondRock Hospitality's CFO described the dynamic bluntly: insurance has become a "deal lever" that is actively reshaping underwriting models.

What the investment framework demands today

The lending environment has stabilized somewhat from the acute tightening of 2023, but hotel acquisition financing remains expensive and conservative. CMBS conduit loans price in the range of 5.88% to 7.49%, with lenders requiring minimum debt service coverage ratios of 1.40x for branded properties and 1.50x for independent hotels. Debt yield requirements typically fall in the 10% to 12% range, and loan-to-value ratios for hotel assets generally cap at 60% to 70% — meaning buyers need substantially more equity than in the sub-4% rate environment of 2021.

Cap rates have begun stabilizing after rising 100 to 150 basis points from their 2021 lows. Gateway market hotels trade at 5.0% to 6.2%, secondary markets at 6.8% to 7.5%, and economy or midscale assets in tertiary locations at 10% or above. CBRE's H1 2025 cap rate survey showed a modest 9-basis-point decline, suggesting the cycle may have peaked. Transaction volume reached $24 billion in 2025, a 17.5% increase over the prior year, with New York alone accounting for $3.7 billion across 29 trades.

One metric deserves particular attention from investors evaluating acquisitions versus new development: the replacement cost gap. JLL calculates that building a new full-service urban hotel costs 71% more than acquiring an existing one. This discount-to-replacement-cost dynamic creates a compelling case for acquisition strategies, particularly for well-located select-service assets in supply-constrained markets where the combination of limited new competition and below-replacement pricing can generate outsized risk-adjusted returns.

OTA commission pressure adds another drag that investors must model carefully. Booking and Expedia charge 15% to 25% per reservation for independent properties, and even branded hotels — which benefit from direct booking campaigns through loyalty programs — pay meaningful commissions on OTA-sourced bookings. When you layer OTA commissions on top of franchise fees that already consume 12% of room revenue, the total distribution cost for a hotel room can approach 25% to 30% for properties without strong direct booking channels.

Conclusion

The hotel investment landscape in early 2026 rewards a particular kind of investor: one who can model granularly, negotiate franchise terms aggressively, and identify markets where supply constraints and demand catalysts converge. The 2026 FIFA World Cup host cities, San Francisco's convention resurgence, and Orlando's new theme park openings represent near-term demand catalysts worth underwriting. Select-service assets in primary and strong secondary markets offer the most defensible margin profiles. The constrained supply pipeline — running at half its historical growth rate — provides structural support for existing asset values.

But the risks are genuine and compounding. Labor costs show no signs of moderating. Insurance expenses are reshaping coastal market economics. Brand-mandated renovations demand capital at precisely the moment margins are thinnest. And the K-shaped demand divergence means that economy and midscale assets face a fundamentally different — and far more challenging — revenue trajectory than their upscale counterparts. In this market, the difference between a shrewd hotel acquisition and a painful one lives entirely in the quality of the due diligence.

Sources:

• STR (Smith Travel Research) — RevPAR data, occupancy trends, demand forecasting, labor cost tracking

• CBRE Hotels Research — Trends in the Hotel Industry report, cap rate surveys, operating cost analysis, franchise fee growth data

• JLL Hotels & Hospitality — Investment trends report, transaction volume data, replacement cost analysis, key money statistics

• HVS (Hospitality Valuation Services) — U.S. Hotel Development Cost Survey, franchise fee guide

• HotStats — Global hotel profitability data, GOP margin tracking

• AHLA (American Hotel & Lodging Association) — Staffing shortage surveys, state of the industry reporting

• Cushman & Wakefield — U.S. Hospitality MarketBeat reports

• Loan Analytic data — Industry sizing, segment performance benchmarks

• Marriott International — FDD/franchise disclosure documents, royalty structures

• Hilton Worldwide — Franchise fee structures, Hampton Inn economics, Hilton Honors program data

• Choice Hotels International — Franchise cost benchmarks

• Best Western Hotels & Resorts — Franchise cost benchmarks

• Chatham Lodging Trust — REIT earnings data, select-service margin reporting

• DiamondRock Hospitality — Insurance cost commentary, CFO statements

• PKF Hospitality Research — Operating expense benchmarks

• Skift — Hotel loyalty program analysis

• Hotel Management magazine — Industry reporting on fees, insurance, labor

• Hotel Business — Franchise fee reporting

• LODGING Magazine — Labor cost analysis, transaction reporting

• Travel Weekly — Demand forecasting, NYU Hospitality Forum coverage

• Hotel Dive — Occupancy trends, investment trend analysis

• CRE Daily — RevPAR decline analysis

• Booking/ Expedia — OTA commission rate benchmarks