California saw a year-over-year increase in new hotel openings in 2025, but that’s a reflection of the projects nearing the finish line last year and not a sign of a new trend.
Atlas Hospitality Group’s California Development Survey 2025 Year End reports 50 new hotels with 7,100 rooms opened last year, a 43% increase compared to the number of hotels that opened in 2024.
But some context is necessary. The mid-year survey found 36 hotels opened in California in the first six months of 2025, a 64% year-over-year increase. The number of hotel rooms that opened was 5,369, a 135% increase.
That gives the impression that openings significantly slowed in the second half of the year, but the 1,600-key Gaylord Pacific Resort & Convention Center opened in May in Chula Vista. Excluding the Gaylord opening, 35 hotels opened with 3,769 rooms in the first half of the year compared to 15 hotels with 3,331 rooms in the second half.
“To have a project that size, I mean, that could equate to 10 hotels,” Atlas President Alan Reay said. “That definitely threw it off.”
The hotel project pipeline for California continues to shrink. By the end of 2025, there were 96 hotels under construction with 11,121 rooms, and 1,120 hotels in the planning phase with 140,526 rooms. At the end of 2024, there were 124 hotels under construction with 16,468 rooms and 1,186 hotels in the planning phase with 153,360 rooms.
The normal barriers to entry for new hotel projects in California remain, but last year also saw increased costs for construction materials and furniture, fixtures and equipment because of the tariffs, Reay said. The cost of construction labor also increased because many crews lost laborers due to U.S. Immigration and Customs Enforcement activity in the state.
“With the tariffs and everything else, it’s just escalated the price of new construction,” he said. “That’s coming in just for a simple three-story, grade-level parking, 120- to 130-room hotel, the construction cost is $250,000 to $300,000 a key.”
The even-higher cost of construction makes new hotel development projects unappealing today, Reay said. The big discount to replacement cost will continue to boost the buying market.
“If you’re a hotel contractor or architect for new hotels, it’s going to be a very slow period of time, and I think that’s at least for the next 12 to 24 months,” he said.
Even though the Federal Reserve decreased the federal funds rate by 75 basis points in 2025, most hotels are not tied to the prime rate, Reay said. Instead, they’re tied to the five-, seven- or 10-year Treasury notes. Construction financing is short-term, so typically lenders will provide a prime-based loan at 1.5 or 2 points above prime for a short period of time.
“Yes, it’s making that appealing, but as a hotel owner, I have to look at it’s going to take me two years to get the project completed, then I’ve got to take out financing,” he said.
The five-year note is at about 3.7%, and the spreads above that are at about 2.5%. The overall rate ends up being in the low 6s, which is better than it was about 12 to 18 months ago, but it hasn’t dropped as rapidly as the prime rate, he said. From a financing standpoint, the best-case scenario is in the low 6s for a five- to seven-year fixed-rate loan that could have a capitalization rate that works out to be 8-plus. On top of that, hotel operational costs are increasing faster than revenue per available room is growing.
“It’s making those deals tough to do,” he said. “I think fundamentally it is the high cost of construction first and foremost, and interest rates are secondary to that.”
In the end, it’s the discount to replacement cost that makes the difference between an owner deciding to build or buy.
“People are looking at the amount of money that they can buy for an existing hotel, and even if they've got to spend $100,000 to $150,000 per room, at least they're below what it’s going to cost them for a brand-new hotel, and they're open a lot quicker than they would be with a new construction.”