Hotel owners are facing a profitability squeeze that extends beyond rising interest rates. Brent Jaynes, Managing Partner at Leisure Real Estate Advisors, says operators are contending with sharp, simultaneous increases in insurance, labor, and commodity costs that cannot be offset by raising room rates alone. This pressure on cash flow is changing day-to-day operations and reshaping hotel acquisition economics.
Jaynes says operators are fully aware of the problem. Insurance premiums are up. Employee wages are higher. Fuel costs have risen. Commodity prices tied to food service have nearly doubled. At the same time, hotels have been unable to raise room rates quickly enough to cover these expenses. The result is a structural decline in hotel profitability that is affecting every segment of the hospitality market.
Breakfast-included properties are among the hardest hit. Basic ingredients such as eggs have seen dramatic price increases, directly eroding margins for hotels that include breakfast in the nightly rate. Insurance costs have jumped across the hospitality sector, and labor expenses have outpaced revenue growth as hotels compete to attract and retain workers in a tight labor market.
The pressure is even greater for hotel owners who refinanced during the period of rising interest rates. Owners who previously paid 4% on their mortgage and now face rates closer to 7.5% have far less cash after debt service to absorb higher operating expenses. This combination—higher debt payments alongside rising day-to-day costs—has created a double squeeze that sharply reduces profitability, even for hotels with stable or growing revenue.
Why Room Rate Growth Is Not Keeping Up With Rising Costs
Hotel operators have raised room rates, but competitive pressures and guest price sensitivity have limited those increases. Jaynes says, “Hoteliers have been squeezed pretty tightly here on all fronts as far as the costs go, because they just haven’t been able to push rates that fast.”
Because operators cannot fully pass these costs on to guests, they must absorb shrinking margins. Some input costs may stabilize. However, labor and insurance costs appear to represent permanent increases. The shift is forcing buyers to reevaluate how they assess acquisition opportunities. Properties that once showed strong cash flow under previous cost structures may now look far less attractive when current expenses are factored in. Buyers who overlook these higher costs risk disappointing returns, even if the property performs well operationally.
Reduced Margin for Error in Hotel Investments
Higher operating and financing costs have reduced the margin for error that once allowed buyers to absorb missteps or unexpected challenges. Jaynes points out that when financing was inexpensive and operating costs were predictable, buyers could make mistakes and still achieve acceptable returns. That safety net no longer exists.
“If you have cash flow, people will be interested. If you’re distressed, it’s more difficult. The cushion for mistakes is gone,” he says.
This shift is directly influencing which properties are selling in today’s market. Distressed hotels and value-add opportunities that once attracted buyers seeking upside through operational improvements are now much harder to sell. Buyers know that turning around a struggling property takes both expertise and good fortune, and the current cost environment leaves no room for error.
Properties with proven, stable operations and strong cash flow continue to attract buyer interest. However, buyers are now demanding higher levels of cash flow to compensate for tighter margins and greater risk. As a result, hotels with only marginal profitability face steep discounts or remain on the market for longer periods.
Impact on Distressed Hotel Pricing
Distressed hotel properties are especially vulnerable in this environment. Jaynes says buyers have become highly selective about which turnaround projects they will consider. A property that might have drawn multiple offers in a low-rate, low-cost market may now receive little or no buyer interest.
“If you’re distressed, you’re going to get hammered on price. If you’re distressed, there’s no way to maximize value in this environment,” Jaynes says.
The challenge extends beyond capital investment. Distressed assets now face a steeper climb to profitability because they must resolve operational challenges while managing higher expenses and increased debt service. For example, a hotel with low occupancy must not only fix its marketing or service issues but also do so with elevated labor, insurance, and food costs. The path to stabilization is longer and more expensive, shrinking the pool of buyers willing to take on these risks.
Jaynes says his firm has seen this pattern repeatedly in recent transactions. Properties that would have sold quickly three years ago now linger on the market, and when they do sell, the price reflects the increased operational hurdles and risk.
Long-Term Implications for Hotel Investors
These operational pressures are pushing the hotel market toward more conservative underwriting and selective acquisitions. Buyers who account for current operating costs are proceeding cautiously. Those who underestimate these expenses risk disappointing returns.
For sellers, this new reality means that only properties with clean operations, strong cash flow, and minimal deferred maintenance will achieve premium pricing. Hotels with operational or financial challenges are subject to deep discounts. The market is splitting between high-quality assets that command stable pricing and distressed properties that struggle to attract buyers.
Jaynes remains positive about the long-term fundamentals of the hotel industry. He notes that travel demand has stayed strong since the pandemic, and recent declines in fuel prices should help sustain travel activity. However, he acknowledges that the operational environment is more challenging, and buyers must factor in these realities when pricing and underwriting deals.
Outlook for Hotel Owners and Investors
Looking ahead, the winners in this market will be properties with solid operational fundamentals and experienced owners who can navigate tighter margins. Margins are tighter, and returns are harder to achieve. The current environment rewards operational discipline and punishes those who underestimate the true costs and risks of hotel ownership.
As cost pressures remain high and revenue growth lags, buyers and sellers alike must recalibrate their expectations. Success will depend on accurately accounting for higher operating costs and maintaining disciplined operations.
