The pandemic influenced shifts in where and how Americans live and work and initiated a greater focus on health/wellness and social experiences. These values are now at the heart of trends in the hospitality industry and are driving capital investment in hotels, with travel domestically and worldwide setting records over the last couple of years, with U.S. domestic travel spending exceeding $1 trillion for the past two year, according to the U.S. Travel Association. This phenomenon is expected to continue for the foreseeable future, along with an explosion in demographic groups, particularly the middle-class and an affluent, healthy older-adult population with a desire to travel.
Consumers Choosing Travel Over Buying Stuff
“We're seeing a tremendous amount of leisure-oriented travel, with consumers continually prioritizing spending on travel relative to physical goods,” said Zach Demuth, global head of Hotels Research in JLL’s Hotels & Hospitality Group. He also noted a return in international travel, particularly from Asia, as a very positive trend for hotels in gateway cities, such as New York, Washington, D.C., San Francisco, and Los Angeles. Additionally, group travel has fully recovered to where it was in 2019, which is benefitting popular group markets like Miami, New Orleans, Atlanta and Austin.
Travel Spending Spurs Surge in Hotel Investment
“We've seen a tremendous amount of fundraising for hotels specifically and diversified funds that have hotel allocations over the past three years," Demuth said. "Looking at the end of 2024, roughly $55 billion in dry powder was allocated for hotel investments on the sidelines, and most of that was raised over the last 24 months. This was the strongest 24-month timeframe that we've seen in at least the last decade,” he added, noting that this included a tremendous amount of fundraising on the private-equity side.
Demuth also noted an increase in diversified funds with relatively small allocations for alternative real estate categories, of which hotels are the biggest piece of it. While hotels are technically considered an alternative asset class, they are increasing becoming more mainstream, he suggested, noting that investment groups are increasing forming “pure play hotel funds” and cited as examples, Noble Investment Group based in Atlanta, Trinty Investments out of Hawaii, and funds with a global reach, like KSL Capital Partners.
From a broad, macro perspective, he said there is an increase in large funds with an LP (limited partnership) interest in hotels, however, from a micro standpoint these funds are very specific in their investment criteria. This includes hotel or market types, with the most significant fund allocations for premium, select-service, upper mid-scale and upscale assets, particularly in secondary or primary high-barrier-to-entry markets. These hotels, which cater to a mix of leisure, business and some group travel, have performed very well post-COVID, Demuth said, and they’re typically in supply-constrained markets, like Boston and Manhattan.
Tim Bodner, a partner at PwC’s Real Estate Practice and U.S. Deal Leader, noted that investors are adapting their portfolios to a shift in domestic travel from coastal markets to inland destinations, like Nashville, Charlotte, Austin, Las Vegas, California’s Napa Valley, Denver and Salt Lake City. This shift in leisure travel destinations is in part due to catastrophic weather events in Florida and California, he suggested.
Market Performance Overcomes Debt Issues
With continued strong performance by hotels overall, the hospitality industry is not experiencing the high level of distress sales or a significant drop in property values like some other asset classes, Demuth said, noting that very few distressed assets have come to market since early 2024. “I think part of that is because hotel fundamentals have been very strong,” he said, noting that this has allowed most hotels to cover their debt service, despite the sharp rise in interest rates. “That said, there are quite a few loans coming due this year and next— by our estimation, give or take $80 billion over the next 24 months,” Demuth continued, noting that this is likely to catalyze transactions but not increase distress. “We do see some markets going through a pricing reset” he added. “San Francisco is a good example.”
A Focus on Creating New Revenue Streams
Demuth noted that one of the biggest trends in hospitality investment is LP’s rallying around hotel programmatic strategies, such as in-house capital improvements that generate new revenue streams, like retail sales and experience-oriented facilities like spas and food and beverage choices. “GPLP partnerships are putting more effort into offering stuff within the hotel that people would want to do or spend money on,” he explained.
Components that cause guests to spend money above the average daily room rate are expected to drive growth in returns for the foreseeable future, Demuth added. “The name on the door is not enough anymore: the brand has to align with the experiences that one gets inside the asset.”
While hotels match services and amenities with their target demographic groups and destinations, Bodner said, “One of the biggest things we've seen materially pick up after the pandemic is a focus on health and wellness. The focus by travelers on experiences with a wellness orientation is, for sure, the most significant trend driving potential partnerships,” Bodner continued, noting that this includes both LP investment in facilities that create a health-oriented, in-house environment and amenity partnerships, like Four Seasons’ partnership with Sensei, a resort that provides visitors a deep dive into health and wellness experiences.
Funding Challenges and Solutions for GPs
GPs across all asset classes face challenges in securing LP partnerships, matching capital with opportunities, and navigating a competitive fundraising environment. “There’s a lot of competition for capital, particularly in the current interest environment of high rates for a long period of time,” said Bodner.
“The market is more competitive, which is why you see a lot of GPs diversifying their capital sources to address challenges in the current fundraising environment,” he added. “We’re seeing more creativity and a wider pool of capital sources being leveraged— relying on the same subset of investors is changing quickly,” Bodner said. He noted that while this is improving returns in the equity market, what really needs to happen is more distribution of capital back to investors to unlock additional investment.
Bodner said that in evaluating risk-return profiles, LPs investing in hotels consider the level of return on investment compared to the cost of capital, the power of operators to drive growth in average daily rates, and how that translates to return on investment.
“Consumers are becoming more sensitive to pricing due to a sustained period of higher prices in general, so there is a question of how much price power does operators still have, and what other levers of value creation do they have beyond trying to drive top line growth through rates,” he continued.
An Improving Debt Market
Over the last six months, bank lenders have loosened their purse strings, providing hotel investors access to lower-cost debt than alternative lenders, Bodner noted. “We've also seen the CMBS market come back with a lot of scale and insurance companies through private credit markets allocate increasing amounts of capital to alternative investments like hotels” he added.
“Hotel debt markets right now are at a better place than we've seen in three or four years,” noted Demuth, with lenders very active right now. “Yes, SOFR index rates are high, but spreads have compressed across the whole spectrum by 150 basis points,” he added. .
With the Big Banks back in play and compression in spreads, the cost of capital has materially decreased, allowing deals to pencil that weren’t penciling before, Bodner continued. As a result, he said, there is a lot of capital chasing the few for-sale assets that come to market, which is causing hotel pricing to accelerate. Demuth said, however, that other than a couple portfolio deals earlier this year, sales volume has remained low due to the lack of supply, which also has made pricing discovery difficult and created a significant gap in what sellers ask and buyers are willing to pay.
Tariffs and Immigrant Deportations to Hit Hotels Hard
Economic uncertainty around the Trump Administration’s tariffs and mass deportation policy, which are likely to create labor shortages, reduce consumer spending by increasing inflation, and create increase for geopolitical blowback that reduces international travel, all worry GP-LPs going forward, Bodner acknowledged.
He noted that building costs are already 50 percent higher than before the pandemic, and tariffs on building materials and deportation of immigrant construction workers will exacerbate costs for both ground-up development and value-add improvements. Tariffs on food, energy and other products from Canada, Mexico, China and other trading partners around the world, along with deportation of undocumented agricultural and hotel workers will raise hotel operational costs, forcing hotels to raise pricing for guests.
And while hotels have adopted technology that streamline some functions and reduce personnel requirements, like digital check-in and concierge services, some hotel jobs, like housekeeping and food and beverage service still require a human touch. Hotels have been suffering from labor shortages ever since the pandemic, and deportation of skilled, immigrant hotel workers will exacerbate this problem and increase labor shortages and costs.
“There is pressure in the system on the labor side that is a factor regardless of what happens with immigration policy, albeit what happens on the immigration front is being closely watched to understand exactly what impact it has,” Bodner said, noting that all of this—tariffs and deportations—is likely to hit the hotel industry hard.
How Global Investors View Trump’s Policies
Additionally, in a new AFIRE (Association of Foreign Investors in Real Estate) International Investor Survey, which included members from roughly 180 institutional investor organizations, including pension funds, asset managers and other leading global investors in 25 countries, 63 percent of respondents had a negative outlook for U.S. cross-border investments in 2025, despite promising fundamentals vs. 42 percent in the fall of 2024.
About 80 percent of respondents agreed that global political tension and economic realignments are currently the greatest threats to cross-border investment, with 40 percent citing tariffs /trade (20 percent) or geopolitics) 20 percent) as having the greatest impact on U.S. real estate investment in 2025, compared to 27 percent who said interest rates (14 percent) or inflation. (13 percent) will have the greatest impact this year. The sentiment survey found that nearly 40 percent of hospitality investors plan to maintain or decrease their investments, compared with less than 5 percent that plan to increase their U.S. investments in 2025.
Of the survey respondent, 69 percent were global investors, 21 percent were U.S. managers, and 10 percent other.
Tariff’s’ Boomerang Effect on Tourism
Due to the tariffs and growing ill-will towards the United States globally, the U.S. hospitality industry and related businesses may be among the first to feel the backlash from U.S. tariffs, according to a Tourism Economics study by Oxford Economics, which warned that hotels could lose as much as $64 billion in cancellations. About $18 billion of that amount is due to an expected 11 percent drop in international travel business, as a result of both foreigners’ anger toward Trump tariffs and politics and negative economics that are squeezing would-be travelers’ bank accounts.
The owner of a Disney-focused travel agency in Florida noted in an Inc. report that what he fears most is consumers’ reaction when they see the wider negative impact of Trump’s tariffs materialize. “When there is trouble in the economy, the first thing people cut is their travel budget,” he said.
Inc. reported anecdotal evidence of travelers from nations Trump’s tariffs are targeting who are abandoning their U.S. travel plans due to fear of an economic slowdown, as well as anger toward Trump’s “America First” treatment of major U.S. trading partners. Reuters reported, for example, that Europeans, which spent $155 billion on travel to the United States in 2023, according to EU figures, are among foreign traveling abandoning plans to visit the America. The report suggests that the decline has already started, with European U.S. travel down 1 percent year-over-year, after surging 14 percent in February 2024.
But nowhere is resentment against Trump and his tariffs greater than in Canada, which is facing a 25 percent U.S. tax on all exports and 250 per cent tariffs on lumber and dairy products. The threat of tariffs threatening to decimate the Canadian economy, along with a proud citizenry insulted by Trump’s assertion that he will make Canada the 51st state, has raised Canadian hackles. A surging number of Canadians are pledging to forego crossing the border for vacation or any reason. The U.S. Travel Association has warned that even a 10 percent drop in Canadian tourism would cost U.S. tourism $2.1 billion, as well as 14,000 U.S. hospitality jobs.
According to Inc., the decline in Canadian visitors began in February, with businesses near the border reporting a 23 percent decline in tourist driving visits by the U.S.’s northern neighbors.
This article originally appeared on our sister site, Hospitality Investor.