The U.S. lodging industry met or exceeded most forecasts to start 2025, with room rates up 1.9 percent and growing demand outpacing new supply by 0.4percent in the first three months of the year. Despite revenue growth, margins continued to contract on wages and non-operating costs, as insurance costs declined in some markets but remained twice as expensive as 2019 levels on average.
The industry continues to bifurcate into midscale and below properties with limited rate growth and growing high-priced “experiential” upscale and luxury hotels. Meanwhile, hotel transactions have remained limited to strategic portfolio rebalancing and one-offs as investors and lenders wait out an uncertain market.
The 14percent year-over-year decline in international travel in March made for dramatic headlines, which overshadowed the increase in April visitation compared to 2024. While summer reservations are down, this may represent a shorter booking window than a drop in travel.
For context, between 4 percent to 7percent of U.S. hotel demand comes from international travelers. If 20 percent of that segment disappears, the overall loss in occupied rooms would be around 1 percent. Like international travel, the effect of government cutbacks on hotel occupancies would represent a loss of around 0.5 percent. There is concern that these minor headwinds could lead to larger problems down the road.
Our projections call for flat demand and modest rate growth representing a 1.3 percent increase in RevPAR, assuming some progress on trade policy. However, because international demand varies by market, the risk of loss is higher in tourist destinations, while the Washington D.C. area is most vulnerable to government demand loss. Some markets, like Chicago, are well-positioned to weather these risks.
Chicago Market Highlights
Although Chicago recovered slower than other major cities, it is insulated from declines in foreign tourism and government business. While 18 percent of Chicago airport passengers are international, 85 percent never leave the airport. Therefore, a 20 percent decline in travel would result in 875 fewer visitors per day. While any loss is a concern, this represents just 0.7 percent of 112,000 hotel rooms in Chicago. Similarly, a 10 percent cut in federal workers in the area would represent just 0.01 percent of the overall workforce.
More crucially for Chicago, conventions accounted for 30 percent of all pre-pandemic room nights, but plunged to 5 percent in 2021. This year marks a potential return to form, with a dozen biannual conferences returning in 2025 for the first time since the pandemic. This would have a positive effect on occupancies, although headwinds are likely to limit year-end occupancy growth to around 0.6 percent for the MSA.
The reliance on conventions requires a large volume of hotel rooms, and disincentivizes demolishing or converting old hotels. Over 4,500 rooms in the CBD have been in continuous operation since the Great Depression, while most rooms built within the last 10 years fall into the upscale and upper-upscale categories, making competing on rate difficult.
Compared to other major cities, Chicago has fewer luxury rooms, and lacks the ultra-luxury appeal of destination markets, which drive rates upwards. Winter discounting also counteracts peak period premiums. For 2025, we expect modest gains in occupancy and ADR, increasing RevPAR by 1.6 percent year-over-year.
Richard Mandigo is the Midwest hotels advisory expert in the CBRE Hotels Valuation & Advisory group. He is based in the firm’s Chicago office and can be reached at Richard.Mandigo@cbre.com. To learn more about the Hotel Horizons forecast reports for 65 markets in the United States, visit pip.cbrehotels.com.