By Erik Ransdell and Mike Annunziata
Strands Realty Group
December 20th, 2024
As 2024 comes to a close, we reflect on a year that tested the hospitality real estate market’s resilience and adaptability. Rising interest rates, cautious investors, and operational hurdles created challenges, but the industry’s ability to innovate and evolve has laid a strong foundation for growth in 2025.
California remained a key focal point for the U.S. hospitality market, showcasing both setbacks and successes. Despite a significant decline in transaction dollar volume, steady deal activity demonstrated that investor confidence persists. Additionally, evolving travel patterns, technological advancements, and new legislative reforms continued to shape opportunities for investors, developers, and operators alike.
2024: A Year of Challenges and Resilience
The financial environment in 2024 presented substantial challenges for hotel real estate. High borrowing costs caused by elevated interest rates resulted in a 50% drop in California’s transaction dollar volume during the first half of the year. According to a CoStar report published on August 9, 2024, total volume declined from $2.3 billion in 2023 to $1.2 billion in 2024. However, deal activity remained relatively stable, with 122 transactions recorded compared to 124 in the prior year. This stability highlights a sustained interest in well-located, high-quality assets, particularly in coastal regions.
Notable transactions during the year included the sale of the Pacific Edge Hotel in Laguna Beach for $80 million and the $163.3 million acquisition of the Claremont Hotel Club & Spa in Berkeley. Both properties exemplify the demand for luxury and iconic locations, even in a tightening financial market.
While many investors hesitated due to higher borrowing costs, the Federal Reserve’s series of interest rate cuts later in the year began to alleviate some financial pressures. Richard Barkham, Global Chief Economist and Global Head of Research at CBRE, noted, “The U.S. economy has achieved a rare soft landing in the face of higher interest rates, and the outlook for growth in 2025 is increasingly optimistic.”
San Francisco faced particular challenges in 2024, becoming a stark example of how reduced business and leisure travel can impact hotel values. The city’s delinquency rates on commercial mortgage-backed security loans soared to 41.6%, up from 5.7% the prior year, leading to significant financial strain on properties like the Hilton Union Square. Urban cores nationwide faced similar recovery hurdles, but San Francisco stood out for its steep declines.
Yet, amid these challenges, corporate and group travel provided a silver lining for the industry. Revenue per available room (RevPAR) from group bookings rose by 6.8% during the first eight months of the year compared to 2023, fueled by companies hosting in-person events and team-building retreats. The revival of group bookings wasn’t limited to corporate travel, as hybrid "bleisure" travel also drove demand.
2025: Signs of Optimism and Growth
Looking ahead, the hospitality real estate market is set to experience modest growth in 2025. Average daily rates (ADR) are expected to increase by 1.6%, while RevPAR is projected to grow by 2.6%. These incremental gains signal a steady recovery, with midscale and extended-stay segments leading the way. The extended-stay market, in particular, has proven to be resilient and profitable, catering to both budget-conscious travelers and the growing digital nomad community.
A significant driver of growth in 2025 will be the rebound in international travel. With global travel restrictions easing, California’s key destinations, including Los Angeles, San Francisco, and San Diego, are poised to attract a surge of international tourists. Industry experts emphasize that pent-up demand for iconic attractions and experiences will fuel this recovery. Adam Burke, President of the Los Angeles Tourism & Convention Board, emphasized, “International visitors are crucial to our recovery, particularly in destinations like Southern California.”
Corporate travel is also expected to play a pivotal role in shaping the hospitality landscape. With hybrid work models firmly established, companies are investing in occasional in-person meetings and retreats to foster collaboration and team-building. Suburban and secondary markets with lower costs are likely to benefit from this trend as companies look beyond major urban centers for value-driven solutions.
Emerging Trends and Opportunities
California’s zoning reforms have created exciting opportunities for developers and investors, allowing for the conversion of underperforming office properties into boutique hotels or mixed-use developments. These reforms address land scarcity in high-demand areas and pave the way for innovative projects that cater to shifting consumer and business needs.
At the same time, technology continues to shape the hospitality sector, with AI-powered solutions enhancing guest personalization and operational efficiency. Smart thermostats, in-room entertainment systems, and energy-efficient designs are becoming standard features, appealing to tech-savvy travelers and environmentally conscious guests. Sustainability initiatives are also gaining momentum, with hotels increasingly focusing on reducing waste and adopting green building practices to meet investor and consumer expectations. Chip Rogers, CEO of the American Hotel & Lodging Association, stressed the importance of these initiatives: “Guests and investors alike are demanding more sustainable operations, making ESG initiatives a strategic priority for our industry.”
Closing Thoughts
As we reflect on 2024, it is evident that the hospitality real estate market has faced significant challenges but has continued to evolve and adapt. Despite economic uncertainties, the sector’s ability to seize opportunities, innovate, and cater to shifting demands has kept it on a path to recovery.
Looking ahead, 2025 brings the promise of international travel returning to pre-pandemic levels, the rise of extended-stay accommodations, and exciting opportunities in repurposing commercial spaces. Whether through strategic investments, technology adoption, or sustainability initiatives, there are countless ways for stakeholders to drive growth and success in the coming year.
As we celebrate the close of another year, we encourage you to take this time to enjoy and cherish your loved ones. The holiday season is a wonderful opportunity to reconnect, relax, and create lasting memories with friends and family. It’s a reminder of the importance of balance and the people who support us in our personal and professional lives.
We want to take this opportunity to thank you for your trust and support throughout the year. Your partnership has been invaluable, and we remain committed to being your go-to resource for all things hospitality real estate. As you navigate acquisitions, reposition existing assets, or explore new opportunities, know that we are here to support you every step of the way.
Happy Holidays and Happy New Year! We look forward to being your trusted hospitality brokers in 2025 and beyond.
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