The U.S. hotel industry is facing another year of limited options for increasing the average daily rate, or ADR, with the current forecast calling for an average gain of just 1%, well below the expected level of cost increases for many expense line items.
In turn, the difference between anemic hotel revenue growth and rising costs is likely to result in narrowing operating margins. As a result, hotel property owners face the prospect of having less money to service their mortgage debts and pay partners a return on their investment.
Through October 2025, margins for gross operating profit, or GOP, declined from the same period last year. Over the first 10 months of 2024, hotel GOP margins stood at 36% but declined throughout the year to 34.8%.
Part of the decline in margins can be attributed to the continued increase in labor costs. Labor costs as a percentage of revenue have, on average, increased from 34% last year to 35% this year. One reason for the higher labor costs is the continued competition for hotel workers from other industries. To remain competitive and retain trained staff, hotel operators must offer wages and salaries that match those of other companies. Anecdotally, hotel operators say they are willing to pay higher rates to avoid costly turnover.
Hotel room revenues have been increasing at a slow pace for several reasons. High inflation is forcing consumers to allocate a smaller portion of their budget to discretionary items, such as travel. Tariffs have introduced uncertainty into the corporate planning process, prompting corporations to reassess budget line items they can control, such as travel in 2026. In addition, competition is growing, albeit slowly, which is putting further competitive pressure on room rate growth.
Looking ahead, the combination of an upward cost spiral and a lack of revenue growth means that margins for earnings before interest, taxes, depreciation, and amortization remain under continued pressure for hotel owners and operators. Through October 2025, EBITDA margins were 24.7%, 100 basis points lower than the 2024 results.
Operators and owners are watching some expected bright spots, such as the FIFA World Cup games scheduled to be held in 11 U.S. markets and the corresponding international tourist demand. In addition, the calendar shift of both July 4 and the December holidays to weekend dates could entice consumers to take longer vacations, providing a welcome boost to hotel demand and potentially to rates.