SOUTHWEST U.S. HOSPITALITY MARKET REPORT – Q1 2025

The Southwest posted one of the strongest Q1 2025 hospitality performances in the U.S., led overwhelmingly by Texas. RevPAR growth was driven by corporate relocations, convention and event calendars, energy-sector activity, and steady leisure demand across key metros. Texas markets outperformed national averages across major data providers, while Arizona and New Mexico contributed stable, seasonally strong performance.

Dallas–Fort Worth and Austin benefitted from large-scale corporate expansions and tech-driven demand, Houston leveraged an energy and medical-led rebound, and San Antonio delivered dependable results supported by tourism, military, and public-sector employment. In Arizona, Phoenix enjoyed strong resort, spring travel, and event-driven performance, while Tucson maintained stable occupancy tied to medical and university demand. New Mexico markets such as Albuquerque and Santa Fe balanced government, arts, and leisure demand with constrained new supply.

Transaction activity increased across the region, especially in the sub-$25 million select-service and extended-stay segments. Capital remained available through bridge, SBA 7(a), SBA 504, and conventional loan structures, although lenders maintained a sharp focus on expense trends, sponsor quality, and realistic underwriting.

Population and corporate migration continue to define the Southwest story. Texas and Arizona, in particular, have attracted corporate headquarters relocations, regional office expansions, manufacturing investment, and logistics growth. This has supported steady weekday demand and broadened the base of higher-rated corporate and group business.

Leisure demand remained resilient across the region, with strong spring travel, national park visitation, and sports and entertainment events. Major events in Texas and Arizona continue to drive compression weekends that support premium ADR and length of stay. In New Mexico, arts, cultural tourism, and outdoor recreation contributed to stable seasonal patterns.

Development remains disciplined due to construction costs, interest rates, and lender caution. Across industry tracking, Southwest hotel deliveries have moderated from earlier-cycle peaks, with select-service, extended-stay, and upper-midscale formats remaining the most financeable product types. Lenders favor markets that offer diversified demand drivers, visibility on future growth, and modest new supply pipelines.

Texas — Regional Anchor and Top National Growth Market

Dallas–Fort Worth — Corporate Relocations and Convention-Driven Strength. Dallas–Fort Worth remains one of the most active and liquid hotel markets in the Southwest. Corporate relocations, finance and tech expansion, and major conventions at Kay Bailey Hutchison and Fort Worth Convention Center all contributed to strong Q1 2025 performance. Airport-area hotels, as well as assets in Plano, Frisco, and Irving/Las Colinas, benefitted from ongoing corporate campus growth and demand from national and regional headquarters. Transaction activity was particularly strong in the sub-$30 million select-service segment, with both institutional and private buyers targeting newer-vintage or recently renovated assets that can be financed with conventional or SBA structures.

Austin — Tech, State Capital, and Entertainment-Driven Demand. Austin continued to support premium ADR relative to other Southwest markets. Q1 performance was bolstered by SXSW, ongoing tech industry travel, state government activity, and a robust events calendar. The Domain, East Austin, and airport corridors remained focal points for investor interest, particularly for lifestyle, boutique, and extended-stay hotels catering to tech and creative industries. While new supply has entered the market over the last several years, demand growth and higher-rated segments have helped maintain competitive positioning for well-located hotels with updated product and strong management.

Houston — Energy-Led Rebound and Diversified Economic Drivers. Houston's Q1 2025 hospitality performance reflected steady improvement across Energy Corridor, Galleria, and Texas Medical Center submarkets. Corporate travel tied to energy, petrochemicals, and engineering firms supported weekday occupancy, while medical and academic travel contributed to strong base demand around the Medical Center. Large events such as the Houston Livestock Show and Rodeo provided significant seasonal compression. Investors are pursuing recapitalizations and refinancing opportunities for stabilized limited- and select-service hotels, particularly where sponsors can demonstrate improved operating discipline and realistic capital expenditure plans.

San Antonio — Tourism, Military, and Medical Stability. San Antonio produced reliable Q1 performance supported by Riverwalk tourism, convention activity, military demand, and healthcare-related travel. Limited new hotel supply relative to demand growth has helped owners preserve ADR, particularly in core tourism zones and around major medical and military facilities. Investors are selectively targeting value-add opportunities where PIPs or modest renovations can reposition assets into stronger brand families or higher-rated segments without relying on aggressive pro forma assumptions.

Arizona — Resort Strength and Suburban Growth

Phoenix — Resort, Events, and Suburban Expansion. Phoenix remained one of the Southwest's strongest resort and event markets in Q1 2025. Spring travel, MLB Spring Training, and a deep roster of conferences and group events contributed to high occupancy and strong ADR. Luxury and upper-upscale resorts in Scottsdale and Paradise Valley benefitted from high-income leisure and group business. Submarkets such as Chandler, Tempe, and Gilbert saw ongoing hotel demand tied to tech, manufacturing, and logistics expansion — much of it anchored by the federally announced CHIPS Act semiconductor investment buildout. Extended-stay and upper-midscale select-service hotels in these corridors continue to attract capital due to consistent operating performance and durable local employment bases.

Tucson — Healthcare, University, and Outdoor Tourism. Tucson delivered stable Q1 performance supported by healthcare travel, university events, and outdoor recreation. Limited new supply in core submarkets, along with a balanced mix of leisure and institutional demand, has attracted investor interest from buyers seeking predictable cash flow in a lower-competition environment.

New Mexico — Government, Arts, and Affordable Leisure

Albuquerque — Government Travel and Cultural Tourism. Albuquerque posted steady performance in Q1 2025, supported by government-related travel, regional business demand, and arts and cultural tourism. The city's events calendar continues to attract leisure visitors, while proximity to major transportation routes supports consistent transient business travel. New development remains limited, creating favorable conditions for existing well-managed assets.

Santa Fe — Boutique, Luxury, and Arts-Driven ADR. Santa Fe remains one of the strongest ADR markets in the Southwest, driven by high-end leisure, arts tourism, and limited boutique supply in core historic districts. Investors are especially interested in well-located small hotels and inns that can benefit from targeted upgrades, brand affiliation, or soft-brand strategies that protect rate integrity.

Emerging Southwest Submarkets to Watch

• El Paso, Texas: Supported by defense, manufacturing, and cross-border trade, with steady business travel and growing investor interest in limited- and select-service hotels.
• Flagstaff, Arizona: Benefitting from tourism tied to the Grand Canyon and regional outdoor recreation, with strong weekend and seasonal occupancy and limited new supply.
• Las Cruces and Ruidoso, New Mexico: Emerging regional leisure and university-driven markets attracting private buyers looking for stable cash flow in less crowded competitive landscapes.

Capital markets remained selective but open for Southwest hospitality deals. Texas captured the largest share of transaction and refinancing activity, with strong sponsor demand for acquisition, recapitalization, and renovation financing. Arizona and New Mexico saw a mix of recapitalizations, smaller portfolio trades, and single-asset transactions.

Macro context continues to drive lender behavior. The Federal Reserve held the federal funds rate at 4.25%–4.50% at its March 19, 2025 FOMC meeting, the second consecutive hold following 100 basis points of cuts in late 2024. Consensus market expectations entering Q2 2025 are for the Fed to remain patient on additional easing pending further evidence on inflation and labor-market dynamics. The 10-year Treasury yield in the 4.20%–4.50% range through early Q2 2025 continues to anchor longer-term commercial mortgage pricing.

Lenders focused heavily on sponsor quality, trailing twelve-month performance, realistic expense assumptions, and clearly articulated renovation or repositioning plans. Loan proceeds and leverage remained conservative compared to prior cycles, but capital was available for well-structured deals with credible business plans.

The most active financing structures in Q1 2025 included:

• SBA 7(a): For owner-operators acquiring hotels, buying out partners, or funding renovations and PIPs where operating company and real estate can be financed together.
• SBA 504: For long-term fixed-rate financing on owner-user hotel real estate, typically paired with a conventional first mortgage to complete the capital stack.
• Bridge loans: For acquisitions, recapitalizations, and transitional business plans involving renovation, repositioning, or the refinancing of maturing debt ahead of a permanent takeout.
• Conventional loans: For stabilized, well-located limited- and select-service hotels with strong operating histories and experienced management teams.
• CMBS and LifeCo permanent financing: For stabilized full-service and upper-upscale hotels with proven cash flow, providing non-recourse, longer-term, fixed-rate solutions; CMBS hospitality executions broadly continued at meaningful spreads over comparable Treasuries through Q1 2025 reflecting the sector's elevated delinquency profile.

Sponsors who can present transparent financial histories, detailed capital expenditure schedules, and thoughtful underwriting continue to secure execution, even if the process requires more structure and negotiation than in prior years.

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Operating Costs and Labor Availability

Labor, insurance, and utility costs remain front-of-mind for Southwest hotel owners. Texas and Arizona markets in particular face competition for skilled staff, and operators are refining scheduling, cross-training, and technology use to maintain service levels while protecting margins. Lenders are closely reviewing historical and projected expense ratios to ensure pro formas reflect current cost realities. Per BLS-published wage data, hospitality wage growth has remained meaningfully above pre-pandemic norms through early 2025, contributing to elevated operating-margin pressure across the region.

Renovations, PIPs, and Brand Repositioning

Many properties across the Southwest are facing brand-mandated PIPs, soft-brand opportunities, or full repositionings. Sponsors who align construction timing with seasonality, negotiate thoughtfully with brand partners, and structure capital stacks that include adequate renovation reserves are better positioned to emerge with stronger ADR and long-term competitiveness.

Distress, Workouts, and Opportunistic Buying

Systemic distress has not materialized, but pockets of stress exist where elevated interest costs, deferred capex, or submarket demand challenges intersect with upcoming maturities. In these situations, owners are exploring loan modifications, extensions, and recapitalizations that introduce new equity alongside more sustainable debt structures. Maturity defaults continue to drive the bulk of new CMBS hospitality delinquencies across institutional measurement methodologies, with stress concentrated in oversupplied submarkets and weaker assets.

For well-capitalized investors, these conditions present selective opportunities to acquire hotels at more attractive going-in yields than those available during the recent peak cycle, particularly where operational improvements and targeted capital projects can unlock value.

Sponsor Sophistication as a Competitive Advantage

Across the Southwest, lenders, franchisors, and equity partners are prioritizing sponsors who demonstrate operational discipline, transparent reporting, and well-structured business plans. Thoughtful underwriting, realistic hold periods, and clearly defined exit strategies have become central to securing favorable financing terms and moving quickly on acquisition opportunities.

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Forward indicators for Q2 2025 and the balance of the year suggest a continuing constructive operating environment for Southwest hospitality fundamentals, with Texas's corporate-migration tailwinds, Phoenix's resort and CHIPS-anchored growth, the Federal Reserve's patience on additional rate cuts, and the runway to the 2026 FIFA World Cup in Dallas and Houston defining the dominant Q2/Q3 themes. Several discrete catalysts and structural drivers warrant sponsor attention.

Federal Reserve Trajectory and Debt-Cost Outlook

The Federal Reserve held the federal funds rate at 4.25%–4.50% at its March 19, 2025 FOMC meeting, the second consecutive hold following 100 basis points of cuts in late 2024. Consensus market expectations entering Q2 2025 are for the Fed to remain on hold through the early summer, with the next directional move dependent on inflation trajectory, labor-market evolution, and the timing and breadth of any tariff-related price impacts. Industry tracking placed conventional bank rates for hotel acquisitions and refinancings in the 7.25%–8.50% range through Q1 2025, with CMBS hospitality executions priced at meaningful spreads over comparable Treasuries reflecting the sector's elevated delinquency profile. The base case for Q2 2025 Southwest hospitality underwriting assumes range-bound rates, continued lender selectivity, and SBA 7(a) and 504 executions remaining the most accessible high-leverage path for owner-operators in the sub-$30 million range.

National RevPAR Outlook and Industry Forecasts

Consensus industry forecasts published in early 2025 by the American Hotel & Lodging Association and aligned across the major tracked universes anchor full-year 2025 U.S. RevPAR growth in a low-single-digit range, with growth concentrated in upper-tier and luxury segments. For the Southwest specifically, Texas urban markets, Phoenix resort and Scottsdale luxury, and Las Vegas Strip executions are expected to outperform the national average, while limited- and select-service properties in oversupplied submarkets across Texas urban cores and outlying Phoenix submarkets are expected to face more muted ADR growth through Q2 2025.

Supply Pipeline Discipline

Across institutional measurement methodologies, the U.S. construction pipeline entered 2025 near multi-year lows, with rooms under construction declining steadily through late 2024 and final-planning project counts moderating as construction financing costs, tariffs on imported building materials, and tighter lender appetite continued to constrain speculative groundbreakings. Within the Southwest, Phoenix and Dallas remain among the highest-pipeline U.S. hotel markets entering 2025, but the pace of new groundbreakings has moderated substantially from 2022–2023 highs. For Southwest markets that have absorbed elevated supply over the last several years, particularly Austin and selective Phoenix submarkets, the supply deceleration provides a tailwind for occupancy stabilization and ADR re-acceleration as the cycle progresses.

CMBS Maturity Wave — Continued Acquisition Opportunity

Industry tracking placed the hospitality CMBS maturity wave at meaningful concentration through 2025–2026, with a substantial portion of the maturing book carrying floating-rate exposure and fixed-rate loans originated at sub-5% coupons facing material refinancing-rate widening on takeout. Q2 2025 is expected to see continued acquisition opportunity from owners unable or unwilling to fund the equity-recapitalization or PIP-cost requirements demanded by lenders on takeout. Across institutional measurement methodologies, lodging CMBS delinquency rates trended higher through late 2024 and early 2025, with maturity-defaults rather than performance-defaults driving most of the increase. Phoenix and selective Texas urban submarkets have shown elevated CMBS stress, creating selective acquisition opportunities for well-capitalized Southwest investors.

2026 FIFA World Cup Runway — Dallas and Houston

Dallas and Houston are confirmed U.S. host cities for the 2026 FIFA World Cup, which runs June 11 through July 19, 2026, with Dallas hosting matches at AT&T Stadium (Arlington) and Houston hosting matches at NRG Stadium. Q2 and Q3 2025 will see continued lender, equity-partner, and revenue-management focus on the runway to the event, including infrastructure investment, hotel renovation completions ahead of the tournament window, and forward-pricing strategies for the June–July 2026 compression nights. The 2025 lead-up period offers sponsors a window to complete PIPs, refresh inventory, and position assets to capture the 2026 catalyst. America250 commemoration events in 2026 are also expected to support meaningful 2026 travel demand across Texas, Arizona, and broader U.S. markets.

Operating Cost and Insurance Environment

Operating cost pressures will remain a dominant Q2/Q3 underwriting variable. Wage growth, insurance, utility costs, and selective tariff-impacted construction expenses continue to weigh on operating margins across the Southwest. Per BLS-published wage data, hospitality wage growth has remained meaningfully above pre-pandemic norms through early 2025. Texas property-tax dynamics, Arizona insurance assessments tied to wildfire and storm exposure, and Las Vegas labor-cost pressures all warrant submarket-specific stress-testing in Q2 2025 underwriting. Sponsors with disciplined revenue management, technology-enabled operating efficiency, and credible cost-control execution histories will continue to differentiate on lender pricing and on equity-partner appetite.

Cornovus View — Capital Strategy Implications

For Southwest hospitality sponsors evaluating Q2 2025 capital deployment, four strategic considerations remain central. First, the CMBS maturity wave continues to produce acquisition opportunities at acceptable going-in yields, particularly across Phoenix's at-risk loan book and selective Texas urban CBDs, but underwriting must reflect post-rebound RevPAR norms rather than 2021–2022 surge assumptions. Second, PIP-driven debt restructuring will continue to dominate refinancing flow through 2025, favoring bridge, mezzanine, and SBA 504 structures for capital-intensive renovations across Texas, Arizona, and Nevada. Third, well-located full-service and upper-upscale assets in Phoenix (Scottsdale, North Scottsdale, Paradise Valley) and Texas (Dallas, Houston, Austin downtown) continue to attract the most aggressive lender competition, while limited-service assets in oversupplied submarkets require additional sponsor equity and more creative debt structures. Fourth, sponsors with diversified Southwest portfolios are well-positioned to execute portfolio-level recapitalizations ahead of the 2026 FIFA World Cup and America250 catalyst as cap rates compress and the institutional bid re-engages.

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