California Hotel Sales Rise in 2025 Driven by Distress & Price Reset
California’s hotel market experienced a surprising turn in 2025, with deal volume increasing in the latter half of the year despite earlier slowdowns. While the total number of hotel sales rose, the price per room declined, signaling a shift in market dynamics driven largely by financial pressures on hotel owners.
Increased Sales, Lower Prices
According to the California Hotel Sales Survey 2025 Year End from Atlas Hospitality Group, 259 individual hotel sales were recorded, a 4.4% increase compared to the previous year. The total dollar volume of these transactions reached nearly $4.1 billion, a substantial 22% year-over-year increase. However, this increase in volume came with a decrease in value, as the median price per room fell by 7.2% to $138,000.
Distress Fuels Activity
Atlas President Alan Reay attributed the increased deal flow to a rise in distressed sales. Hotels like the Parc 55 and Hilton Union Square in San Francisco sold for less than their prior valuations. This suggests that lenders were motivated to offload stressed assets before the end of the year, contributing to the higher transaction volume.
Several other hotel owners, including Ashford Hospitality Trust and other publicly traded real estate investment trusts, were also motivated sellers. The state may have a record number of hotels available for sale, though sellers face limitations on how much they can lower prices due to existing loan obligations.
Economic Pressures Mount
Underlying the increase in sales is a confluence of economic factors impacting hotel owners. Net operating income is down across the board, while expenses are rising. Owners who benefited from low-interest-rate loans in the past are now facing significantly higher debt service costs – roughly double what they previously paid – as those loans come due. Even with recent reductions by the Federal Reserve, debt costs have risen from below 4% to around 6%.
Adding to the challenge, appraised values have decreased over the past two to three years, meaning owners may need to inject capital to refinance their loans.
Looking Ahead
The number of notices of default on hotels is increasing, indicating further financial strain. Reay anticipates more lender-related sales in the first half of 2026, which could further depress the median price per room. These defaults are particularly prevalent among independent hotels and those in the lower chain scale, many of which secured loans with as little as a 10% down payment through the U.S. Small Business Administration.
The current market reflects a “reset” in pricing, with the focus shifting from interest rates to what sellers are willing to accept. California’s hotel-to-housing programme, Homekey, remains active, though less so than in previous years. Private-sector buyers continue to explore converting hotels into affordable housing, attracted by the lower costs compared to new construction.
Converting a hotel to apartments eliminates many operating expenses, such as housekeeping, credit card commissions, and franchise fees. The cost of purchasing and converting a hotel – around $130,000 per key – is significantly lower than the $400,000 per unit cost of building new apartments.
Frequently Asked Questions
What drove the increase in hotel sales in California during the second half of 2025?
Distressed sales were a significant factor, with lenders and owners motivated to offload properties due to financial pressures.
How did the median price per room change in 2025?
The median price per room fell by 7.2% to $138,000, despite an increase in overall sales volume.
What factors are contributing to the financial difficulties faced by hotel owners?
Declining net operating income, rising expenses, and increasing debt service costs due to maturing loans are all contributing to the challenges.
As the economic landscape continues to evolve, will the trend of hotel conversions to affordable housing accelerate, and what impact will this have on the overall hospitality market?