Constrained pipeline could present strategic openings for developers

HVS’s survey is based on actual cost budgets from 2024 projects. It captures per-room development costs across six hotel product types: limited-service, midscale extended-stay, upscale extended-stay, select-service, full-service and luxury. While HVS cautions that the survey should not be used for year-over-year cost comparisons, it notes that the report provides insight into current market dynamics and cost structures.

The findings highlight that while operational performance supports the rationale for new development in select submarkets, broader market participation remains cautious. While U.S. hotel performance is strong, the survey indicates that translating that strength into new construction remains a challenging task in 2025.

Supply-and-demand dynamics

The U.S. hotel market continued its steady normalization in 2024 and early 2025, with ADR pushing higher despite flat occupancy levels. According to STR, year-end 2023 occupancy held at 63% and ADR reached $158.67. Through May 2025, occupancy declined slightly to 60.9%, while ADR edged up to $159.58, resulting in a 1.2% RevPAR gain year-over-year, underscoring a pattern of modest but consistent growth.

Leisure-led markets, which rebounded quickly post-COVID, experienced a slowdown in 2024, while urban destinations saw stronger RevPAR gains. Primary U.S. markets outpaced the rest with a 2.7% RevPAR increase in 2024, narrowing to a 1.4% increase in early 2025, signaling that the leisure-urban performance gap may now be rebalanced.

At the same time, macroeconomic headwinds remain a top concern. Investor and traveler sentiment has been shaped by persistent inflation, muted international travel and political uncertainty surrounding the 2024 election. As the market adjusts to a new administration, developers and owners are closely watching for shifts in regulatory and fiscal policy that could reshape demand patterns.

Meanwhile, hotel supply growth has slowed considerably, rising just 0.2% in 2023 and 0.5% in 2024 due to high construction and financing costs. Forecasts through 2026 predict annual growth of less than 1%. However, this constrained pipeline may present a strategic opening. Developers with patient capital and long-term outlooks are moving forward with pre-development activities, aiming to capitalize on market conditions when they turn favorable. In today’s increasingly competitive environment, early movers can gain a significant competitive edge in the next cycle.

Heading into the second half of 2025, construction-cost inflation continues to decelerate, creating a more favorable environment for hotel development. Two primary factors drive this trend: firstly, the broader economic landscape has experienced a meaningful reduction in overall inflation, easing upward pressure on wages, materials, and services, and secondly, hotel construction activity has slowed considerably in recent years, with the active pipeline down sharply from prior peaks. As fewer projects compete for labor and subcontractor availability, pricing power has shifted slightly back toward developers, resulting in more competitive bids and less volatility in cost estimates. However, new or potential tariffs are injecting uncertainty into the cost structure. Still, the current environment is generally more favorable for advancing feasible developments.

Per-room costs

HVS collected actual hotel construction budget data nationwide in 2024 for the survey, which included ground-up development projects throughout the U.S.. The states most represented in the survey were Florida, California, Texas and Georgia. Notable in this year’s survey is the number of luxury developments where all-in costs well exceeded $2 million per room.

Limited-service and midscale extended-stay hotels had median per-room costs in the $167,000-169,000 range. The median cost for hotels in the upscale extended-stay and select-service categories was around $265,000 per room and $223,000 per room, respectively. The cost to develop full-service hotels is noticeably higher than select-service hotels, with a median cost of $409,000 per room for full-service projects. Lastly, the median cost to develop luxury hotels was recorded at over $1,057,000 per room. In summary, the median hotel development cost across all surveyed properties was reported at $219,000 per room, similar to 2024’s survey, supporting the stabilization of construction costs.