Hospitality bifurcates as luxury outpaces lower tiers

The U.S. hospitality sector in 2025 is navigating a convergence of challenges, from persistent inflation and elevated debt costs to global market volatility, labor shortages and supply chain disruptions. These pressures are compressing margins, reshaping pricing strategies and widening the performance gap between hotel segments. For hotel owners and operators, segment performance hinges on the ability to leverage pricing power, maintain cost resilience and strategically leverage technology to preserve profit margins.

Segment performance has become increasingly polarized

Hotel performance has become sharply segmented, driven by disparities in pricing power and consumer price sensitivity. Hotels in the “luxury” tier (comprising both luxury and upper upscale properties) have been more successful in driving premiums than properties in the “midscale” (comprising upscale and upper midscale) and “economy” (comprising midscale and economy) segments, which have seen a deceleration in their average daily rates (ADR).

Over the past 12 months, the luxury segment maintained the highest average monthly ADR increase, and the segment remains resilient, posting a 2.13% increase in June 2025. By contrast, the midscale segment’s 12-month ADR growth slowed to 0.68%, and the economy segment saw modest improvement, peaking at 0.48% before falling to 0.13% in June. Although overall ADR growth remains positive, it's largely driven by the higher-end segment. Lower-tier segments are showing signs of rate stagnation.

This divergence in rate performance reflects fundamental differences in consumer behavior. The luxury sector is propelled by affluent guests who are less sensitive to price increases and seek value from premium offerings like wellness retreats and farm-to-table restaurants. Conversely, midscale and economy travelers are more susceptible to macroeconomic pressures, which lead to constrained budgets and heightened sensitivity to rate increases.

Consumer expenditure data supports this bifurcation. According to the U.S. Bureau of Labor Statistics, the top 20% of income earners now outspend the remaining 80% on lodging by a growing margin. In 2019, the spending gap was $1,303 per household; by 2023, it had widened to $1,752. This shift underscores a rising concentration of travel demand among high-income households, bolstering the luxury segment while creating headwinds for midscale and economy hotels. 

A deeper dive into ADR and cost pressures

While nominal ADR growth remains positive across the hospitality sector, real growth, adjusted for 2.7% inflation, is muted. Luxury segments are better positioned to withstand inflation, with real ADR declines contained to just 0.57% in June. Midscale and economy segments, however, posted steeper real declines of 2.02% and 2.57%, respectively, highlighting their vulnerability to rising costs.

This trend is unlikely to be remedied by the easing of external pressures. Hotels are dealing with rising costs in multiple areas, including debt servicing, labor and undistributed expenses. According to an industry survey by CBRE, insurance expenses continue to increase at a double-digit pace, growing by 17.4% in 2024. Property taxes increased by 4.3%, maintenance department costs increased by 5%, and marketing and information technology expenses grew by approximately 5%. Tariffs on imported goods, including linens, furniture and electronics, are further straining profit margins.

Driving rates and controlling costs

Different hotel segments implement technology and artificial intelligence solutions in distinct ways, reflecting their unique market positions and financial pressures. The luxury sector is supported by high demand and has more resources to drive investments in AI-powered revenue management and personalized technology. These investments enhance service quality and sustain premium pricing. In-room smart technology, predictive and personalized analytics for guests, and digital concierges can all be used to enhance the guest experience and build loyalty.

Unfortunately, certain costs hindering real revenue growth are out of an operator’s control, meaning that a strategic focus on controlling costs is paramount. Midscale and economy operators can prioritize technology like self-check-in kiosks, digital chatbots and automated marketing communications to optimize operational efficiency and minimize labor costs. These measures can reduce staff intervention and operational costs, prioritizing efficiency over a unique guest experience.

The outlook

The U.S. hospitality sector faces a polarized landscape. Luxury hotels are leveraging pricing power and technology to sustain growth, while midscale and economy segments contend with price-sensitive customers and shrinking margins. Inflation, the cost of capital and undistributed costs will continue to challenge profitability, particularly for the lower-tier segments. It is critical for owners and operators to deploy targeted technology solutions to navigate the current economic headwinds and preserve profitability.