Hotel room rates to surge as new supply slows
Surging construction costs that now force hotel developers to spend as much as $830,000 per room are hitting the pace of new supply across Australia’s major markets and point to a surge in room rates for existing top-end properties as competition slows.
The surge in costs – which reflects the same challenges hitting new residential development – have pushed the price per room, including construction, furniture, fixtures and equipment costs that high in Sydney, and to $795,000 in Brisbane and $772,000 in Melbourne, consultancy RLB says.
Developers say this is a big problem.
“The CBD in Sydney, very difficult to get a location. It’s very difficult in Melbourne CBD to make anything stack up economically now, given the supply’s quite strong,” Quest Apartment Hotels’ managing director David Mansfield told The Australian Financial Review.
“The cost to develop a property in a city CBD at the moment is just so expensive.”
As a result, the nation’s development cycle, which picked up around 2020, has begun to show signs of easing, with just 2339 new hotel rooms delivered to the market in 2025. This lifted the nation’s total supply by only 1.3 per cent to 135,579 rooms, according to Colliers research.
Melbourne had the largest net increase in hotel supply, rising more than 1014 rooms, followed by Sydney, accounting for recent openings such as 1 Hotel in Melbourne and 25hours Hotel The Olympia in Sydney.
Higher room rates resulting from the supply squeeze were not a sign the industry was flourishing, Mansfield said.
”The cost to develop, the cost to operate is eating away at any of the returns, and that is continuing, and that is the real concern for our sector,” he said.
As a result, Quest was now focusing its new portfolio on regional and subregional locations such as Southport in the Gold Coast and Ringwood, about 25 kilometres east of Melbourne’s CBD, Mansfield said.
IHG Australasia’s managing director Matthew Tripolone said construction cost escalation and labour availability had affected timelines across development, and hotels were no exception.
“The key challenges for new supply are elevated construction costs, financing conditions and labour availability, combined with planning and approval timelines in some markets,” he said.
“Feasibility is more sensitive than in prior years, requiring greater capital discipline and careful brand alignment. A moderation in new supply will allow markets to stabilise ahead of the next growth phase, and conversion value-add opportunities are currently an important complementary growth lever for global brand companies.”
As the nation’s hotel supply pipeline decelerates, average occupancy levels across the major markets are growing. In 2025, Sydney’s hotel occupancy hit 83.4 per cent, Perth reached 80.9 per cent, Melbourne was 77.3 per cent and Brisbane was 75.7 per cent, in part due to Australia’s rich sporting and cultural events calendar.
This indicated that markets were getting closer to capacity as demand continued to strengthen, particularly during peak trading times, Colliers’ Karen Wales said.
“Room rates are therefore expected to increase as hoteliers increase rates during periods of high demand [such as] midweek and when cities are hosting major events,” Wales said. “For example, try getting a hotel room in Adelaide during Gather Round.”
This is enticing local and international capital to invest in Australia’s hotel sector.
Thai hospitality group KS Hotels purchased the Park Hyatt Melbourne for around $205 million in August and global media conglomerate The Generation Essentials Group acquired a 50 per cent stake in the Ritz-Carlton Perth for about $100 million.
US private equity giant Blackstone snapped up one of Australia’s best-known resorts, Hamilton Island in Queensland, from the Oatley family in late December, with a source not directly involved with the transaction saying it sold for about $1.2 billion.
While new hotel supply is slowing, Colliers has identified about 7272 hotel rooms as under construction and set to open through to 2028, with about 30 per cent of this pipeline outside major city markets such as Sydney and Melbourne.
