Hospitality Sector Navigates RevPAR Shifts Amid Economic Headwinds
By Majid Radaei, RadCRE · · Industry Insights
U.S. hotel RevPAR growth is decelerating, with STR reporting Q1 2026 figures trending below earlier forecasts, as economic uncertainty impacts leisure and business travel.
U.S. Hospitality Sector Faces RevPAR Deceleration and Shifting Demand
The U.S. hospitality sector is experiencing a notable deceleration in Revenue Per Available Room (RevPAR) growth, signaling a more tempered outlook for 2026 than initially projected. According to recent data from STR, Q1 2026 RevPAR growth for the U.S. national average came in at approximately 2.8% year-over-year, significantly below some analysts' early 2025 predictions of 4-5%.
Leisure Demand Softens, Business Travel Holds Steady
Much of this moderation can be attributed to a softening in leisure travel demand, which had propelled the sector post-pandemic. While drive-to leisure markets saw robust performance through 2024, the current environment indicates a more discerning consumer. Conversely, business travel and group segments are showing resilience, particularly in major urban centers and convention destinations. For instance, Q1 2026 saw gateway cities like New York and Los Angeles report RevPAR gains closer to 4.5-5.0%, buoyed by increased corporate bookings and large-scale events, as reported by CBRE Hotels Research.
Geographic and Segmented Performance Divergence
Performance remains highly bifurcated across geographies and hotel segments. Luxury and Upper Upscale segments continue to outperform, demonstrating pricing power. Data from Green Street Advisors reveals that cap rates for premium hotel assets in core markets have largely remained stable, albeit under pressure from higher interest rates, hovering around 6.75-7.5% for well-located full-service hotels. In contrast, select-service and extended-stay assets, while fundamental to many portfolios, are facing greater sensitivity to average daily rate (ADR) adjustments amidst increased competition.
Transaction activity has also reflected this cautious optimism. While large portfolio deals have slowed, strategic single-asset acquisitions continue. For example, Starwood Capital’s sale of the 357-key W Hotel in Brickell, Miami, to Coughlin International Group for an undisclosed sum in late 2025, underscored continued investor appetite for trophy assets in high-growth markets, even in a higher-rate environment.
Operational Challenges and Cost Pressures
Beyond RevPAR, operational costs continue to exert pressure on hotel profitability. Labor expenses, insurance premiums, and utility costs remain elevated, compressing profit margins even for properties managing to maintain ADRs. Hotel operators are increasingly focused on technology adoption to enhance efficiency and guest experience, a trend highlighted in recent earnings calls by major hospitality brands like Marriott International and Hilton Worldwide.
RadCRE Perspective
"The current RevPAR environment underscores precisely why granular underwriting and strategic capital allocation are more critical than ever. The headline national RevPAR figures mask significant variance. At RadCRE, we’re advising clients to look beyond the average; it's about the micro-market, the specific segment, and the competitive set. While leisure is indeed softening, don’t mistake it for a collapse. High-barrier-to-entry markets with strong corporate demand drivers or unique experiential offerings are still robust. We’re structuring deals where the borrower can demonstrate a clear path to managing operating expenses and where the capital stack is diversified. With bridge lending rates still elevated (SOFR + 300-600 bps for sound deals) and CMBS spreads tightening but still at T+150-300 for well-capitalized assets, understanding the true cost of debt and its impact on cash flow is paramount. For acquisitions, especially in value-add plays, creative financing solutions like mezzanine financing (12-18% IRR) or programmatic joint venture equity are often necessary to bridge the gap between acquisition yield and stabilized returns."
Majid Radaei, Founder of RAD Commercial Realty
Outlook for the Remainder of 2026
The hospitality sector is expected to continue navigating a landscape of moderate RevPAR growth and heightened operational scrutiny through the remainder of 2026. While widespread distress is not anticipated, opportunities for strategic acquisitions and value creation will likely emerge for well-capitalized investors capable of navigating market complexities and optimizing operational efficiencies. RadCRE continues to work with clients to identify these opportunities and structure robust financial solutions across the hospitality spectrum.
Tags: hotel investment sales, RevPAR trends, hospitality sector performance, commercial real estate financing, value-add acquisitions
Sources: STR, CBRE Hotels Research, Green Street Advisors, Commercial Observer