As of mid-2025, the U.S. hospitality sector continues to navigate a shifting landscape shaped by persistent cost pressures, evolving market dynamics, and pockets of both opportunity and risk. Hotel labor costs per occupied room (POR) have surged across many major markets, with the steepest increases concentrated in the Sun Belt and coastal destinations. Meanwhile, legislative changes, including rising minimum wage mandates in markets like Los Angeles, are compressing operating margins at a time when recovery is still uneven across regions.

Conversions have emerged as a critical strategy for growth and repositioning as ground-up hotel development faces sustained headwinds from high capital costs and lingering economic uncertainty. From large-scale office-to-hotel redevelopments like San Diego’s Tower 180 project to the rebranding of aging independent properties in markets such as Los Angeles and San Francisco, owners are exploring creative ways to align underutilized assets with ongoing hospitality demand.

Performance remains mixed across regions. Coastal and urban leisure markets are seeing robust demand but face significant labor cost escalation and mounting union pressures. In contrast, Northeastern and Midwestern markets report more moderate cost inflation but may lack the same upside in revenue growth. Some cities—especially those reliant on government travel or large group events—face additional headwinds from budget tightening and shifting policy priorities.

Looking ahead, owners, operators, and investors must navigate a balancing act: protecting profitability amid rising expenses, repositioning or repurposing assets where feasible, and capitalizing on opportunities to acquire or convert properties in distressed but strategically located markets. Operational efficiencies, careful workforce management, and a keen eye on local market trends will be critical to maintaining margins and unlocking long-term growth as the industry adapts to this new cycle.

Macro Trends Impacting U.S. Hospitality

Surging Hotel Labor Costs

Labor costs per occupied room (POR) have reached record highs in many major U.S. hotel markets, placing increasing pressure on operators’ bottom lines. Destinations such as San Diego and Phoenix have seen labor costs jump more than 30% compared to pre-pandemic levels, while Los Angeles and Miami report nearly 29% increases. Other markets like Nashville and New Orleans lead the pack with double-digit gains in 2025 year-to-date figures.

Local wage legislation is amplifying these pressures. In Los Angeles, for example, a newly approved minimum wage increase will raise hotel worker pay to $30 per hour by July 2028, further squeezing profit margins. As labor costs now consume a larger share of revenue—reaching up to 46% in some full-service markets—Gross Operating Profit (GOP) and EBITDA margins have eroded significantly. Los Angeles, for instance, has seen GOP margins slip from 29% in 2019 to just 20% in 2025, while EBITDA margins have halved.

These challenges are forcing owners and operators to rethink traditional staffing models and identify operational efficiencies that can offset rising expenses without sacrificing guest service levels. In some cases, this means investing in cross-training, task automation, and strategic outsourcing to preserve profitability.

Slowing Ground-Up Development & Rise of Conversions

Economic headwinds, elevated construction costs, and the higher cost of capital continue to dampen new hotel development pipelines nationwide. As a result, conversions have emerged as a strategic alternative for owners looking to unlock new revenue streams. This includes both adaptive reuse—like converting underutilized office towers into hotels—and repositioning older independent hotels under major brands to tap into broader loyalty and distribution channels.

However, the path from concept to conversion is far from straightforward. Developers face architectural challenges, structural constraints, and often prohibitive costs. For instance, the Tower 180 redevelopment in San Diego is notable not only for its scale—560 hotel rooms—but also because its architectural configuration and vacancy status make it one of the few viable office-to-hotel conversions in California. Markets like Los Angeles and San Francisco are exploring similar opportunities, though many projects stall when feasibility does not align with return expectations.

Regional and Segment Variations

The impact of these trends varies widely by region and market segment. Sun Belt and coastal destinations are experiencing the steepest labor cost inflation, compounding challenges for properties already exposed to high minimum wage thresholds and unionized labor. In contrast, Northeastern and Midwestern cities like Houston, Philadelphia, and New York have seen relatively moderate or flat increases, providing some relief for operators in those areas.

Conversion opportunities also differ based on local brand composition. Markets with a higher share of independent hotels, such as Los Angeles and San Francisco, tend to present more runway for conversion to branded properties. Meanwhile, heavily branded markets like Dallas or Atlanta have fewer independents available, so conversions there often focus on rebranding within existing brand families or leveraging soft-brand collections to refresh aging assets.

Understanding these local nuances will be essential for stakeholders aiming to protect margins, reposition assets, and capitalize on growth in an industry that remains highly segmented by region, market type, and brand mix.

Notable Case Study: San Diego Tower 180 Conversion

One of the most significant examples of adaptive reuse in the current hospitality market is J Street’s $250 million plan to convert the vacant Tower 180 office building in downtown San Diego into a dual-branded Hyatt hotel. Partnering with Hyatt, J Street aims to transform the 25-story, 560-room property into one of the largest office-to-hospitality conversions ever undertaken in Southern California.

Tower 180’s architectural features made it uniquely suited for such a conversion. Originally built in 1963 as the U.S. National Bank Building, the property underwent extensive renovations in 2020, which modernized key systems and reduced the need for costly upgrades. The building’s main tower and annex allow for efficient guest room layouts, and its fully vacant status eliminates the tenant relocation challenges that often complicate adaptive reuse projects.

This project highlights a broader trend in U.S. urban centers, where aging or underutilized office buildings are being reimagined for new uses in the wake of persistently high office vacancies. According to recent data, San Diego alone has over 1.7 million square feet of office space currently in transition—part of a national wave that reflects changing demand for traditional workplaces.

Yet, Tower 180 is the exception rather than the rule. Many planned conversions stall when economic and architectural realities collide. Structural constraints, costly design modifications, and high construction expenses can make transforming older office stock financially unfeasible. In California, where construction and labor costs are already high, relatively few office-to-hotel conversions have moved forward despite increased interest. J Street’s pivot from a potential multifamily use to a hotel concept demonstrates how developers must carefully assess market conditions, location, building design, and demand drivers—such as San Diego’s strong convention and leisure business—to make a conversion pencil out.

This project underscores that while office-to-hotel conversions offer an appealing growth pathway in today’s constrained development landscape, success depends on a precise alignment of market demand, physical feasibility, and financial viability. For markets like downtown San Diego, where the right mix of these factors exists, such projects can play a pivotal role in revitalizing urban cores and expanding hospitality supply.

Brand Composition & Conversion Strategy

The share of independent hotels in a given market has become a critical indicator for identifying where conversion growth is most viable. Markets with a high percentage of unbranded or independently operated properties offer fertile ground for major hotel brands to expand their footprint through conversions, especially as new-build development remains constrained by economic and capital cost headwinds.

Los Angeles and San Francisco stand out as two of the most promising examples: both cities have hotel inventories that are more than 60% independent. This market structure creates significant opportunities for owners of aging or underperforming properties to align with a major brand, unlocking access to broader distribution networks, loyalty programs, and established operating standards. As labor costs and competitive pressures mount, many independent operators see brand affiliation as a path to stabilizing occupancy and rates while modernizing the guest experience.

By contrast, markets such as Dallas, Atlanta, and Washington, D.C., are already heavily branded with a relatively small pool of independents available for repositioning. In these cities, conversion opportunities typically involve moving properties between brand families or refreshing flagging assets through soft-brand collections that allow owners to maintain some uniqueness while gaining the benefits of brand affiliation.

Markets with a more balanced mix—such as New York, Las Vegas, and San Diego—offer dynamic conditions for both directions: independent-to-brand conversions and selective moves by branded properties into boutique or soft-brand segments to stay competitive. These cities have a diverse range of property ages and guest segments, creating conditions where repositioning strategies can flex as market demand shifts.

Ultimately, understanding the local brand composition and the motivations of independent owners will be crucial for investors and operators aiming to capitalize on the current wave of conversion-driven growth. In high-barrier-to-entry markets, well-executed conversions can deliver meaningful RevPAR premiums, stronger market positioning, and a more resilient asset over the long term.

Regional Market Snapshots

Los Angeles

Los Angeles remains one of the nation’s most closely watched hotel markets due to its record-high labor costs and forthcoming labor legislation. Year-to-date 2025 figures show total labor cost per occupied room (POR) in LA’s full-service hotels has reached an unprecedented $250—roughly 36% higher than pre-pandemic levels in 2019. With the city’s minimum wage for hotel workers slated to rise incrementally to $30 an hour by July 2028, operators are grappling with profitability challenges that could drive service-level reductions, leaner staffing, or delayed property reinvestments.

Despite these pressures, LA’s hotel sector is expected to remain a focal point for both domestic and international travel with major global events on the horizon, including the 2026 World Cup and the 2028 Olympics. These events could boost demand and occupancy, but owners will need to manage razor-thin margins carefully to fully capture the upside.

San Francisco Bay Area

The San Francisco Bay Area continues to experience some of the most severe distress in the U.S. hotel market. Several large hotels, including the Parc 55 San Francisco and Hilton Union Square, are tied to a single $725 million CMBS loan that became delinquent in 2023, contributing to a surge in CMBS distress rates for the region. Overall, nearly half of the area’s securitized hotel loans are now in special servicing, with many assets in the Upper Upscale segment.

Yet, there are signals that investor appetite for well-located premium properties remains intact. The first quarter of 2025 saw $550 million in new CMBS originations, including significant refinancings like The Clancy Hotel in downtown San Francisco. While average daily rates and RevPAR remain below pre-pandemic levels, well-leased, high-quality assets are still commanding competitive financing terms, indicating selective optimism despite the city’s slow recovery.

Colorado

Colorado has emerged as a relative bright spot for landmark hotel transactions in 2025. The Thompson Denver’s $95 million sale and the Viewline Resort Snowmass’s $144 million transaction underscore healthy investor demand for premium properties in attractive leisure and mixed-use destinations. These deals reflect confidence in markets where supply remains limited and demand for high-quality room product persists, especially in ski resorts and urban cores with diversified demand drivers.

However, not all Colorado hotel markets are immune to headwinds. Colorado Springs, long supported by steady government and military travel, has seen a pullback in performance following federal spending cuts and the suspension of most government travel charge cards for civilian employees. March RevPAR fell sharply by double digits, highlighting how quickly policy shifts can impact even historically stable submarkets.

Border Cities

Hotel demand in key U.S. border cities has become increasingly volatile amid recent shifts in security measures and trade policy. Along the Mexican border, cities like San Diego, El Paso, and McAllen/Brownsville are feeling the effects of tariffs and heightened security protocols. For instance, troop deployments and changes in tariff timelines created short-term demand surges in El Paso but were quickly followed by declines once nonessential travel was curtailed and new tariffs took hold.

In San Diego, international air travel from Mexico has dropped sharply, contributing to weaker hotel demand despite the city’s usual status as a high-performing coastal leisure market. These fluctuations underscore how border economics, federal policy, and cross-border travel sentiment are now critical variables for operators to watch in these communities, adding another layer of unpredictability for owners and investors.

Distress & Investment Outlook

While parts of the U.S. hotel market have regained their footing, distress remains concentrated in several key urban cores—most notably in San Francisco and other large coastal cities that depend heavily on business travel and group events. Loan defaults and CMBS delinquencies have surged since the pandemic, with San Francisco standing out as a national outlier: the city’s hotel CMBS delinquency rate spiked to around 50% in early 2025, driven by high-profile defaults like the Parc 55 and Hilton Union Square.

This wave of distress has created a window of opportunity for well-capitalized investors looking to acquire hotel assets at a discount. Buyers are monitoring troubled loans, forced sales, and foreclosure proceedings to identify assets with long-term upside once recovery takes hold. However, the path to stabilization is expected to be long and uneven in some urban cores, as persistent challenges—including sluggish international travel, shifting corporate demand, and negative media narratives—continue to weigh on performance metrics like RevPAR and ADR.

Adding to the complexity is the timeline for CMBS maturities. Many urban hotel owners face significant refinancing hurdles as loans come due in the next 12 to 24 months, often at higher interest rates and with stricter underwriting standards. San Francisco alone has more than $460 million in CMBS maturities remaining in 2025, with additional large maturities looming in 2028. This pipeline could fuel more distressed sales as borrowers weigh the costs of recapitalizing versus exiting.

For investors, the current cycle represents both a challenge and a strategic opportunity. Those prepared to deploy capital into well-located, structurally sound assets can position themselves to benefit as distressed markets eventually rebound. Still, patience and rigorous due diligence will be required to navigate complex workouts and ensure that the economics of any acquisition can support the capital improvements and operating costs necessary for a successful turnaround.

Headwinds & Risks

The hospitality sector’s recovery faces persistent headwinds that could slow momentum and further strain margins in the near term. One significant pressure point is the sharp reduction in federal travel spending, which is already being felt in markets with heavy reliance on military and government-related lodging demand. Cities like Colorado Springs and San Diego, anchored by major defense installations and contractors, have seen occupancy and RevPAR slide as government agencies suspend nonessential travel and tighten budgets.

Meanwhile, wage pressures continue to build nationwide. Local legislation, such as Los Angeles’ path to a $30 per hour hotel minimum wage by 2028, is reshaping operating cost structures in key urban and leisure destinations. For operators already seeing labor expenses consume nearly half of total revenue, further increases could force tough decisions on service levels, staffing, and reinvestment priorities.

Macro-economic signals also present challenges. Consumer confidence remains fragile amid inflationary pressures, and corporate travel demand is not yet back to pre-pandemic levels in many urban cores. International visitation, once a major tailwind for gateway cities like San Francisco and New York, continues to recover slowly, hampered by shifting visa requirements, negative media coverage, and changing traveler sentiment.

Finally, tariff and trade policy shifts are adding volatility in border regions. New or reinstated tariffs, security initiatives, and international trade tensions have already led to erratic demand in key cities like San Diego, El Paso, and McAllen/Brownsville. Operators in these regions are navigating sudden swings in cross-border travel and business activity, highlighting how external policy changes can ripple through local hotel performance with little warning.

Taken together, these risks demand that owners and investors remain agile—balancing near-term cost containment with long-term positioning strategies to protect asset value and capitalize on emerging opportunities when conditions stabilize.

Key Opportunities & Strategic Recommendations

Despite the challenges facing the U.S. hotel market in 2025, owners, operators, and investors have meaningful opportunities to protect profitability and unlock long-term value by taking a proactive, market-specific approach.

First, adapting staffing models will be essential to offset surging labor costs. Operators should continue investing in workforce cross-training, technology-driven efficiencies, and smarter scheduling to maintain service standards with leaner teams. Innovative approaches to labor deployment can help preserve margins even as wage floors rise in markets like Los Angeles.

Second, conversions represent an actionable strategy in the current development climate. Owners should identify properties—especially older independents or underused office buildings—where brand affiliation or adaptive reuse can unlock new demand, higher RevPAR, and more predictable cash flow. Markets with a high share of independent hotels, like LA and San Francisco, or buildings with favorable architectural configurations, like San Diego’s Tower 180, will be key targets.

Closely monitoring urban office markets will also be critical. As vacancies persist, the potential for office-to-hospitality conversions will grow—but success will hinge on feasibility studies that weigh structural constraints, location, and local demand drivers.

For investors, distressed assets in dislocated urban markets offer significant upside for those with the capital and patience to navigate complex workouts. Cities like San Francisco, where CMBS delinquencies remain elevated, will continue to present acquisition opportunities for buyers who can reposition assets and ride the recovery wave.

Finally, operators must remain vigilant about policy shifts that impact the cost of doing business. This includes wage legislation, evolving travel restrictions, and trade or tariff policies that affect border cities and international visitation. Building flexible business plans, securing financing options early, and stress-testing forecasts against downside scenarios will help stakeholders stay resilient as external factors evolve.

By combining disciplined operations with targeted investment strategies, the most prepared owners and investors can emerge from this cycle with stronger assets and market positioning for the next phase of growth.