The Bay Area hotel market has taken great strides so far in 2026, leading the country in revenue per available room growth in the first quarter.

But after the steep slide touched off by the pandemic and with costs rising, the market still has a long way to go before it finds full recovery. As a result, hotels are contending with distress and, in some cases, selling for rock-bottom prices.

“We’re coming off such a low base in the Bay Area,” Atlas Hospitality Group President Alan Reay said. “We're still not where we were back in 2019. We're still seeing distress in the larger hotels, and that is because even though room revenues are up, expenses are way up, and they're having a hard time penciling.”

RevPAR among San Francisco-area hotels is expected to average $142 for 2026, according to a February report from Visit California.

But the metric won’t return to 2019 levels for at least a few more years, the tourism agency predicted. RevPAR is expected to reach $149 by 2029, short of the $169 recorded in 2019.

And as revenue remains depressed, operating costs are up.

Operating a hotel in the Bay Area has become significantly more expensive this year as owners face sharp increases across nearly every major cost category. Labor remains the biggest pressure point, with wage growth continuing and many properties still understaffed, forcing operators to offer higher pay and additional incentives to retain workers.

Rising insurance premiums, higher utility and energy costs, and more expensive goods and supplies have added further strain, creating a cost environment that is outpacing revenue growth and squeezing margins for hotel owners across the region.

“It's not easy to make a good profit in San Francisco, even with all the recovery and growth we've seen,” said Alex Lee-Bull, first vice president with CBRE’s San Francisco-based hotels group.

Hotels in Silicon Valley are enjoying a moment of increased occupancy due to multiple World Cup games at Levi's Stadium in Santa Clara, while properties in San Francisco benefit from strong convention business at Moscone Center, which projects 674,000 room nights for the year.

Two years prior, conventions at Moscone Center accounted for 399,000 room nights, according to the San Francisco Travel Association.

The year has already seen a sharp uptick in hotel foreclosures, especially in the East Bay, where hoteliers are under pressure from reduced overnight stays and declining business travel that is crimping cash flow. Foreclosed properties are changing hands at steep discounts as well.

In mid-June, the 128-room Hyatt House in Pleasanton was purchased out of foreclosure by a San Diego investment group for $800K, or $6,250 per key, The Mercury News reported.

Earlier in the month, the 151-room Hyatt Place Fremont/Silicon Valley sold out of foreclosure to a Fresno-based group for about $13.2M, or roughly $87K per key, while the 142-room Hyatt House Pleasant Hill traded for $3.3M, or $23K per key, The Mercury News reported.

Additional distressed East and South Bay properties include the 108-room SureStay Plus Hotel by Best Western in Richmond, which stopped paying its $11.6M loan, and the 52-room Fontaine Inn in east San Jose, which defaulted on its $6.5M loan.

The discounted prices realized in recent transactions don’t bode well for owners of distressed economy properties looking for a soft exit, Reay said.

Hotels and motels along the Interstate 880 corridor and other regional freeways are struggling under reduced occupancy, Reay said, and in many cases, their real estate loans have reset at much higher interest rates.

“A lot of loans were done five to seven years ago and were in the low 4%, but now they have to pay in the high 6% to 7%, so it’s almost double on carrying cost as their net operating income declined,” Reay said. “That's a large part of the distress in the marketplace.”

The headwinds facing the economy and midclass hotels in other parts of the Bay Area have blown equally hard for luxury hotels in San Francisco, despite the surge in artificial intelligence-related corporate travel.

The two largest hotels in San Francisco, Parc 55 and Hilton San Francisco Union Square, which make up nearly 3,000 rooms, were purchased out of foreclosure last November for $408M by Newbond Holdings and Conversant Capital. The outstanding debt on the assets totaled $874M.

The 821-room Hyatt Regency Embarcadero is expected to be purchased by Blackstone Real Estate for $279M. Blackstone in November acquired the 277-room Four Season Hotel for $130M.

Blackstone’s acquisitions can be taken as a long-term vote of confidence in the San Francisco hotel market, Reay said.

“Blackstone is one of the most savvy hotel investors in the United States,” he said. “Blackstone is very well capitalized and is not under the same pressure as existing owners. They can stay in these deals, and for the long term, they see [San Francisco] as a great market.”