Rising hotel insurance and operating costs put pressure on profitability

Higher insurance premiums, maintenance expenses and borrowing costs are squeezing hotel profit margins and complicating investment decisions.

Hotel owners and operators face growing pressure from insurance premiums, property maintenance, labour and financing costs. Even where travel demand supports revenue growth, higher expenses are making it harder to protect profit margins and justify new investment.

The challenge affects both daily operations and long-term property ownership. Insurance and maintenance add to the cost of keeping hotels operational, while labour and utilities influence routine spending. Higher borrowing costs can also restrict cash flow and complicate acquisitions, refurbishment and expansion plans.

US industry data illustrate the scale of the pressure. Research by CBRE, covering approximately 2,600 hotels, found that total revenue increased by 2.3% in 2024, while operating expenses above gross operating profit rose by 4.1%. Insurance costs increased by 17.4%, maintenance expenses by 5% and labour costs by 4.8%.

Although these figures relate to the US, they highlight a wider challenge for international hospitality businesses: protecting profitability requires effective cost management as well as revenue growth.

Hotel insurance premiums become a growing concern

Property insurance is a significant expense for hotel owners, particularly in locations exposed to extreme weather, flooding, wildfires and other physical risks.

Hotels need insurance to protect buildings, equipment and operations against potential losses. Coverage may include property damage, liability claims and business interruption. However, rising rebuilding costs, more expensive repairs and changes in insurers’ risk assessments can increase premiums and make suitable coverage harder to secure.

According to CoStar, insurance expenses per hotel room increased by an average of 195% across the 25 largest US hotel markets between 2019 and 2024. Weather-related risks and higher replacement costs contributed to the increase.

The impact varies by location and property type. Coastal resorts, hotels exposed to natural disasters and properties with extensive facilities may face different insurance requirements from smaller urban hotels.

Higher premiums can reduce returns even when occupancy and room rates remain stable. Changes to deductibles, exclusions and coverage limits can also increase owners’ exposure to financial losses.

Managing insurance costs involves more than comparing quotations. Regular building inspections, fire protection, water leak detection and preventive maintenance can help reduce the risk of avoidable damage.

Insurance requirements also differ between markets, making it important to assess each property’s exposure rather than apply the same approach across an entire portfolio.

Better risk planning can help manage insurance costs

As insurance becomes more expensive, hotel owners are reviewing how they manage risk and secure suitable coverage.

Portfolio-wide insurance arrangements may help larger operators manage certain risks or negotiate terms, although these approaches require specialist expertise and may not suit every business.

Independent hotel owners can benefit from reviewing policies with experienced insurance advisers to identify gaps in protection, overlapping coverage and opportunities to improve risk management.

Property valuations are another consideration. Declared values should reflect current rebuilding costs, as underinsurance can leave substantial funding gaps following serious damage.

Preventive measures cannot guarantee lower premiums, but documented maintenance programmes, effective safety procedures and reliable claims records can strengthen an owner’s risk-management position.

The aim is to balance insurance expenditure against the potential financial consequences of inadequate protection.

Maintenance costs add pressure to hotel budgets

Hotel buildings and facilities require regular investment to remain safe, operational and competitive.

Heating and cooling systems, plumbing, electrical equipment, lifts, guest rooms and public areas all need routine servicing. Unexpected equipment failures can lead to costly repairs and disrupt operations.

CBRE’s research found that maintenance department costs at US hotels increased by 5% in 2024, reflecting higher labour and supply costs alongside previously deferred work.

Older hotels may face greater challenges when major building systems require replacement or guest rooms need refurbishment. Delaying essential maintenance can reduce immediate spending but may lead to more expensive repairs, equipment failures and guest dissatisfaction.

Maintenance also affects revenue. Rooms taken out of service reduce the number available for sale, while poorly maintained facilities can weaken guest reviews and a hotel’s competitive position.

Planned maintenance programmes help operators identify problems early, prioritise repairs and schedule expenditure more effectively. Owners should distinguish routine maintenance from larger capital projects, such as replacing major equipment or undertaking substantial refurbishment.

The appropriate approach depends on the property’s condition, operating needs and long-term investment strategy.

Labour and operating expenses squeeze hotel margins

Insurance and maintenance are only part of the cost challenge. Labour remains one of the largest expenses for many hotels, covering housekeeping, reception, food and beverage, maintenance and management.

CBRE found that salaries, wages and employee benefits across its US hotel sample increased by 4.8% in 2024. Wage pressures, recruitment difficulties and reliance on temporary staff can add to operating costs.

Hotels must manage staffing expenses without compromising service quality. Excessive staffing can reduce margins, while substantial cuts may result in slower service, heavier workloads and a poorer guest experience.

Scheduling employees according to expected demand can help align labour costs with occupancy. Cross-training staff for suitable roles and reviewing departmental productivity can also improve efficiency.

Energy, water, supplies and contracted services create further financial pressures, although cost trends vary between countries and properties.

Monitoring consumption, reviewing supplier agreements and investing in efficient equipment can help reduce unnecessary spending.

The objective is not simply to cut costs, but to maintain service standards while ensuring expenditure delivers an appropriate commercial return.

Fixed costs make weaker hotel trading more difficult

The impact of rising expenses depends partly on how costs respond to changes in demand.

Fixed or relatively inflexible costs can include insurance, certain property taxes, lease payments and contracted services. These remain payable even when occupancy declines.

Variable costs, including laundry, guest amenities and some food and beverage supplies, generally change with business volumes. Labour and utilities often contain both fixed and variable elements.

When demand weakens, fixed costs become harder to absorb because fewer occupied rooms generate revenue. Higher occupancy can increase income, but it also brings additional spending on staffing, cleaning and supplies.

CBRE’s 2024 findings illustrate this relationship. Total revenue across its US hotel sample rose by 2.3%, while operating expenses above gross operating profit increased by 4.1%. Expenses below gross operating profit also increased, by 3.6%.

When costs rise faster than revenue, profit margins come under pressure unless operators can improve efficiency, generate additional income or adjust other spending.

For hotel owners and asset managers, analysing departmental costs and comparing results with relevant industry benchmarks can help identify where improvements are needed.

Higher borrowing costs complicate hotel investment

Financing expenses add another challenge for hotel owners and investors.

Hotels are capital-intensive assets that often require substantial borrowing for acquisitions, development, refurbishment and refinancing. Interest rates affect debt-servicing costs and potential investment returns.

When financing becomes more expensive, a greater share of cash flow may be needed to meet interest payments and other debt obligations. This can reduce the funds available for property improvements, expansion or distributions to investors.

Higher borrowing costs can also widen the gap between buyers’ and sellers’ price expectations.

Buyers assess potential income against acquisition prices, financing requirements and future capital expenditure. Sellers may be reluctant to accept lower valuations, particularly if they expect trading conditions to improve.

Transactions can consequently take longer to complete or fail to proceed when projected returns do not justify the purchase price.

The impact varies by market, lender, loan structure and individual property. Hotels approaching refinancing deadlines may face greater pressure than those with longer-term fixed-rate borrowing.

For investors, testing financial forecasts against different interest rates, occupancy levels and operating costs can help determine whether an acquisition or development remains viable under less favourable conditions.

Rising expenses influence hotel investment decisions

Insurance, maintenance and financing costs can affect hotel valuations and the attractiveness of future projects.

Investors assess a property’s expected operating income, capital requirements and potential returns. When expenses increase faster than revenue, the income available to owners may decline.

Hotels requiring extensive refurbishment can face particular scrutiny because buyers must consider both the acquisition price and the cost of upgrading the property.

Insurance exposure can also influence development decisions. Properties in higher-risk locations may require additional protective measures and greater ongoing insurance expenditure, affecting projected returns.

Developers need to incorporate these considerations into feasibility studies before construction begins. Existing owners may need to assess whether renovating, refinancing, repositioning or selling a property offers the best financial outcome.

However, higher costs do not automatically make a hotel unattractive to investors. Properties with strong demand, efficient operations, manageable debt and a clear competitive position may continue to deliver attractive returns.

The key is to assess each asset on its financial and operational characteristics rather than rely on revenue growth alone.

Hotel operators focus on improving efficiency

Controlling expenditure is increasingly important as hotel businesses seek to protect margins without compromising the guest experience.

Effective cost management begins with identifying where spending can be reduced or better controlled while maintaining safety, service standards and property condition.

Labour planning, supplier negotiations and energy monitoring can all help improve efficiency. Reviewing contracts and consolidating purchases may also reveal opportunities to reduce unnecessary expenditure.

Technology can support these efforts through better demand forecasting, staff scheduling and building system monitoring. However, new systems bring implementation, training and maintenance costs, making it important to assess expected returns before investing.

Regular inspections and timely repairs can reduce the risk of expensive equipment failures and help owners plan capital expenditure.

Operators should review performance by department, comparing costs with revenue, occupancy and service requirements. This can help distinguish unavoidable price increases from inefficiencies that management can address.

The aim is to improve the value generated by each pound or dollar spent, rather than make broad cuts that could damage long-term performance.

Hotel profitability requires more than room revenue growth

Revenue per available room (RevPAR) remains an important measure of hotel trading, but it does not show how much profit a property generates.

A hotel may achieve higher room rates and occupancy while recording weaker financial returns because insurance, labour, maintenance and other costs have increased.

Gross operating profit per available room (GOPPAR) provides a broader measure by comparing gross operating profit with available rooms. It helps operators assess how effectively revenue is converted into operating profit.

However, GOPPAR does not necessarily include every cost associated with owning and financing a property. Depending on the reporting framework, insurance, property taxes, rent, financing expenses and capital expenditure may fall outside the measure.

Owners should therefore assess operating profit alongside cash flow, debt-servicing requirements and planned capital investment.

This broader approach is particularly important when comparing hotels with different ownership structures, building conditions and financing arrangements.

For management teams, the priority is to understand not only whether revenue is growing, but whether the property generates sufficient returns to support maintenance and future investment.

A long-term approach to hotel cost management

Rising insurance premiums, maintenance expenses, labour costs and borrowing charges are increasing the importance of financial discipline across the hospitality industry.

The pressures vary between countries and properties, but they highlight the need to manage operating performance alongside the wider costs of owning and financing hotels.

For operators, improving efficiency while maintaining service quality and essential maintenance remains a priority. Owners and investors must also assess insurance exposure, capital requirements, debt obligations and expected returns when making financial decisions.

Sustainable hotel profitability depends on more than attracting guests and increasing room revenue. It requires careful control of the costs of operating, maintaining and financing properties, supported by realistic budgets and disciplined investment decisions.