By Sharon Hirschowitz
Given your extensive experience in hotel development and asset management, what are the current trends in the luxury hotel market that are capturing the attention of developers and investors?
In 2023, the national lodging market continued to achieve high performance levels, as revenue per available room (RevPAR) reached all-time highs. According to STR data, 2023 calendar-year RevPAR for the luxury chain scale was 3% higher than 2022 levels, peaking at over $280.Year-to-date 2024 data through August shows a continuation of this trend, with RevPAR increasing approximately 1% over the same period in 2023. This trend continues to underscore the strength of the luxury hotel sector, creating a supportive environment for owners and investors to pursue development opportunities.
Aside from numerics, travelers’ tastes and preferences naturally percolate in the minds of developers. Today’s luxury travelers seek immersive, authentic experiences that connect them with local culture, leading developers and brands to design and program hotels that offer a strong sense of place rather than a focus on consistency. At the same time, luxury hotels are increasingly incorporating wellness programs and amenities like spas and holistic health experiences, making this a key differentiator in the segment. Wellness-focused properties offer more than just a physically luxurious room; they also provide a holistic approach to well-being that resonates with today’s discerning travelers.
What are some of the key challenges and pipeline issues facing the luxury hotel development market today, and how can developers navigate these obstacles effectively?
Development cost is one of the key challenges facing developers today. Over the last decade, development costs have skyrocketed above and beyond inflationary rates, and the high inflationary environment since 2020 has certainly not helped. According to the recently published HVS Development Cost Survey 2024, all-in development costs for luxury hotels are averaging over $1 million per property, a new peak!
The rise in development cost is forcing developers, more than ever, to be highly discerning about every aspect of a hotel development project, ensuring a true and calculable return of investment (ROI) for every component of the project.
Hotel developers are also getting creative with value engineering by optimizing design choices and construction methods to control costs without sacrificing the quality that is demanded of luxury hotels.
In your view, where is the primary funding for luxury hotel developments coming from, and how are economic conditions influencing these investment sources?
I am seeing a wide variety of funding options that are available for qualified sponsors of luxury hotel developments. Private equity firms, institutional investors like real estate investment trusts (REITs), and high-net-worth individuals continue to be drawn to the long-term value potential of luxury hospitality assets. For projects in leisure-driven resort markets or high-barriers-to-entry urban markets, sovereign wealth funds and family offices also play an important role, often backing projects that align with their long-term investment strategies or offer portfolio diversification.
The current economic conditions, particularly rising construction costs and an elevated interest rate environment, are pushing developers to be more strategic about their capital stack. Many developers are looking to joint ventures and public-private partnerships to reduce individual risk while still securing sufficient capital.
Increasingly, brands and operators are expected to financially participate in making hotel development projects happen. Strategic owners are seeking assistance from development advisory consultants such as HVS when it comes to sourcing and selecting brands and operators in an effort to maximize brand and operator financial contributions to their projects.
With the current economic climate, what concerns do luxury hotels have from an asset management and development perspective, and how can they mitigate potential risks?
From an asset management perspective, rising operating costs are a concern for ownership. Luxury hotels tend to be more labor-dependent than hotels in other chain scales, and labor costs have risen significantly since the pandemic. Similarly, inflation has also driven up utility costs, supply costs, technology costs, insurance costs, food costs, and everything in between, putting pressure on owners’ profit margins. Both owners with existing hotels in their portfolio and owners seeking to develop must contend with these increased costs and build them into their investment decisions. Through a hands-on asset management approach, luxury hotels can better manage rising labor costs and maintaining first-class guest service by strategically optimizing their workforce. One effective approach is cross-training employees to perform multiple roles, allowing for a leaner team without sacrificing service quality. Operators are also focusing on holistic employee retention strategies, understanding that high turnover is both costly and disruptive to service standards. Furthermore, owners are increasingly investing in technology to mitigate rising costs. The latest in-room technology such as smart thermostats, lighting controls, and entertainment systems can offer guests more control over their stay, while also helping hotels save on energy costs. Now more than ever, it is critical for owners to consider active asset management across their portfolios to ensure that their interests are kept secure in this challenging economic climate. Experienced hospitality-focused consulting firms such as HVS offer solutions to this asset management challenge, with a number of strategies that have proven to help owners protect their hospitality investments.
Looking ahead to 2025, what should luxury hotel developers and asset managers expect in terms of market opportunities and potential challenges?
While challenges remain from a cost standpoint, the pipeline for luxury hotel development continues to be robust. Luxury travel is here to stay. Affluent travelers prioritize unique, high-quality experiences and are less affected by economic shocks, ensuring consistent demand for unique, personalized luxury hotel offerings.
