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What’s Driving the U.S. Hospitality Sector in 2025? A Deep Dive into Q1 Market Forces and Financing Activity

By April 8, 2025
What’s Driving the U.S. Hospitality Sector in 2025? A Deep Dive into Q1 Market Forces and Financing Activity

What’s Driving the U.S. Hospitality Sector in 2025? A Deep Dive into Q1 Market Forces and Financing Activity

Written by Ben Blanton, Vice President, Originations

As Q1 2025 concludes, data from various markets and projects reveal a nuanced picture of the U.S. hospitality sector. While some challenges affect the industry broadly, many trends are highly submarket-specific—what succeeds in one region may not apply in another. Below is an analysis of key factors shaping the market and recent developments in capital markets.

Key Factors Impacting the Hospitality Sector

Tariffs and Construction Costs

The high cost of development remains a significant challenge. During the onset of COVID-19 in 2020, material prices surged, pushing development costs as high as 20%–60% above original budgets. Many projects that broke ground in 2019/early 2020 experienced delays and now face difficulties refinancing due to elevated costs and tighter underwriting standards.

In 2025, a second wave of cost pressures has emerged – tariffs. Recent increases on imports such as steel, aluminum, and other essential materials have prompted contractors to raise prices. For instance, hotel supply growth in 2024 was under 1%, significantly below the 30-year average of 2.5%, indicating a slowdown in new construction partly due to these financial pressures. At current and forecasted RevPAR levels, many new developments are no longer financially viable, leading to project delays, downsizing, or cancellations.​ Reuters

Gateway and business-focused markets are particularly vulnerable. Strained international trade relations and reciprocal policies have contributed to a 23% year-over-year decline in Canadian drive-in visits to the U.S. as of February 2025, affecting demand in key destination cities. ​Asian Hospitality

Insurance: A Rising Cost Burden

Insurance—especially in Florida and other climate-vulnerable regions—continues to be a growing concern for both existing properties and new developments. In many cases, property insurance has become one of the top five operating expenses, eroding operating margins and investment returns.​

Rising premiums force operators to divert funds from essential areas such as maintenance, guest experience, and renovations. This often leads to deferred non-essential improvements that can reduce competitiveness and guest satisfaction over time.

Moreover, elevated insurance costs can make it more difficult to secure financing, particularly for new developments in high-risk zones. Lenders are increasingly cautious, factoring long-term operational risks into underwriting.

Capital Markets Update: 2025 Financing Highlights

Despite macroeconomic challenges, well-positioned assets in strong submarkets continue to attract competitive financing. Below are recent examples from Q1 2025:

  • Cash-Out Refinance – Florida
    • Asset: Hilton-branded hotel
    • Structure: Fixed-rate loan, 5-year term, no prepayment penalty
    • Highlights: Significant cash-out above prior loan balance, provided by a balance sheet lender
  • Ground-Up Construction – Florida (University Market)
    • Asset: To-be-built extended-stay Hilton hotel near a major Power-5 university
    • Structure: Fixed and floating rate options, 36 months of interest-only followed by a 5-year fixed-rate term, 25-year amortization
  • High-Leverage Refinance – South-Central U.S.
    • Asset: Extended-stay Hilton property
    • Structure: 70% LTV (DSCR-driven), 5-year fixed-rate term with 25-year amortization, interest-only period during change-of-ownership PIP
    • Highlights: Full loan balance plus closing costs covered, no depository requirement. Lender’s primary underwriting metric is DSCR-driven, which allows the sponsor to avoid a cash-in refinance due to standard maximum LTV constraints

Final Takeaway

While tariffs and insurance remain significant obstacles, deals are still being completed – especially where sponsors have strong market positioning and lender relationships. Operators and developers must navigate these challenges with greater precision, focusing on risk mitigation, submarket performance, and innovative capital strategies.