2026 likely tale of two cities

New York City-based LARC also forecasts U.S. hotel EBITDA to decrease 1.1% in 2026 and hotel values to decrease 3%. However, over the next five years, LARC expects hotel values to increase a total of 2%.

With increasing economic uncertainty, LARC also expects U.S. hotel cap rates to rise 25 bps through 2029, on average. This increase is driven by widening spreads (or risk premia), offset by expectations for the Fed to cut rates.

With increasing economic uncertainty, LARC also expects U.S. hotel cap rates to rise 25 bps through 2029, on average. This increase is driven by widening spreads (or risk premia), offset by expectations for the Fed to cut rates.

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For full-year 2025, LARC forecasts for the 62 markets and 19,000 unique geographies under its coverage that U.S. RevPAR is expected to decrease by 0.7% to $99.50, driven by ADR growth of 0.8% to $160.35 while occupancy declines 1.6% to 62.1%. It also expects 2025 U.S. hotel EBITDA to decline 5.5% and hotel values to decrease 4%.

LARC also issued an upside scenario and a downside scenario of its U.S. forecast. The upside scenario is based on Moody’s Analytics forecast that assumes there is a 75% probability that the U.S. economy will underperform the upside scenario. The downside scenario assumes that there is a 75% probability that the U.S. economy will outperform the downside scenario.

Under the upside scenario, RevPAR would increase 1.3% in 2025 and 9.0% in 2026, before turning negative in 2027. Under the downside scenario, RevPAR would decrease 2.6% in 2025, and another 2.6% in 2026, before beginning to recover in the middle of 2027.

LARC continues to expect there to be U.S. lodging markets that materially outperform as well as those that underperform national averages.

Over the medium-to long-term, LARC expects markets with outsized exposure to high-end leisure transient and group to outperform. However, in the immediate term, those with strong convention calendars and World Cup exposure are likely to yield the most growth.

Risk factors

Furthermore, expense pressures will become a substantial factor in identifying markets that are winners and those that are losers, particularly with several major cities recently completing or soon to negotiate collective bargaining agreements. Recent finalized agreements in several U.S. cities have resulted in a roughly 10% annual increase in wages over the next five years and a reset back to pre-pandemic staffing levels.

LARC expects nonunion hotels to keep pace with wage growth at union properties across these markets, though many are already paying wages above union-mandated levels.

Layering in added political risks like the Safe Hotels Act in New York City and the increased minimum wage in Los Angeles (from $18 to $30 by 2028), which could be duplicated in other major markets, wage and expense growth is likely to be a bigger component of value change than top-line performance across many markets. Therefore, wage and expense growth and their strain on margin growth materially shape LARC’s views on markets that are best and worst for investment today.

Layering in added political risks like the Safe Hotels Act in New York City and the increased minimum wage in Los Angeles (from $18 to $30 by 2028), which could be duplicated in other major markets, wage and expense growth is likely to be a bigger component of value change than top-line performance across many markets.

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Also of note, LARC said that Mark Zandi of Moody’s Analytics (the economist they rely on) estimates the probability of recession at 49% and sees the greatest risk of recession in late 2025 or early 2026.

Nonetheless, the implications of such a shift across the lodging industry could be pronounced. Fewer jobs will translate into fewer people with means to travel. A tight labor market will also limit upward pressure on wage growth, which will further limit growth in disposable income for leisure travelers, a reversal of the strength experienced across the segment coming out of the pandemic. However, these leisure headwinds would be skewed away from the high-end leisure traveler, which is likely to be more insulated and could even benefit from these macro-economic dynamics.

In the more immediate term, LARC said heightened uncertainty tied to policy initiatives and the implications on unemployment levels and inflation have caused the U.S. consumer to grow increasingly wary, as evidenced by the dramatic decline in the University of Michigan Consumer Sentiment Index which registered a low of 53.6 during May, the lowest level since 1980. While Consumer Sentiment has improved from this historical trough, it remains at extremely low levels.

Additionally, subsequent to a 9% increase in inbound international travelers during 2024, volume has declined 4% year to date through July, representing an additional challenge for the sector.

The shift in this trend can be tied to policy and rhetoric coming from the current presidential administration, ranging from tariffs to border control. In fact, Canadian travel to the U.S. is down over 7% year-to-date, a decline of almost 500,000 visitors. This is most relevant as the tariff war hit Canada months before many other countries and could be an indication of what is still to come from other international visitation feeder nations, according to LARC.

In 2019, the U.S. was a net importer of about 4 million travelers. On a trailing-twelve-month basis as of July, the U.S. was a net exporter of about 16 million travelers. That 20-million traveler swing is weighing on hotel performance, especially in gateway markets.

LARC expects this trend to reverse in 2026 as sentiment toward the U.S. improves and America hosts the World Cup across multiple cities. It anticipates that the World Cup events alone could boost 2026 U.S. RevPAR by nearly 2%, primarily through ADR growth. While that will be a positive nationally, the impact will be isolated to a handful of gateways markets hosting marquis matches (New York, Miami, Los Angeles, Atlanta and Dallas primarily).

Shifting to LARC’s outlook for corporate demand, sluggish job growth may not have the same negative implications as it does for leisure demand. Entry-level roles are less likely to be corporate travelers and are the jobs most at risk from technological advancement. From a group perspective, trends continue to be holding despite the soft jobs data. In fact, LARC estimates that the U.S. convention center booking pace is up 4% on a year-over-year basis in 2025, following the 3% increase in 2024. The convention booking pace is up another 7% year-over-year in 2026.