📢Luxury hotels are carrying the hospitality recovery, with RevPAR and ADR growth well above all other chain scales. The sector is splitting: high-end assets are gaining occupancy, pricing power, and capital flows, while midscale and economy hotels face margin compression and weak demand.
Luxury hotel RevPAR +3% YTD through July 2025.
Luxury ADR +3% YTD.
Upscale RevPAR +0.9% YTD.
Economy RevPAR –1.9% YTD, ADR –0.8%.
Wage growth in hospitality ~+8% YoY.
Economy hotels’ EBITDA margins down to 25–30% vs. 35% historically.
Luxury hotel trades closing at sub-6% cap rates.
Loan Performance
Cash flow bifurcation is sharpening. Luxury and upper-upscale NOI growth is supported by strong ADR gains and resort fee income, improving DSCR and refinancing prospects. Conversely, economy and midscale loans risk covenant pressure: flat to declining RevPAR combined with rising OpEx erodes coverage. Lenders are increasingly requiring higher FF&E reserves (4–5% of revenues) for lower-tier properties to guard against deferred CapEx risk.
Demand Dynamics
Affluent travelers continue to prioritize 5-star stays, with group and international demand returning to luxury urban and resort hotels. Middle-class travel is shrinking, with shortened trips and lower occupancies in budget hotels. The shift toward experiences benefits luxury, but hybrid work has limited rebound for weekday-dependent select-service hotels.
Asset Strategies
Luxury operators leverage cash flow to accelerate renovations, add amenities, and lock in corporate/group contracts. Lower-tier assets face brand compliance costs, margin erosion, and declining competitiveness. Many midscale and economy properties are exploring alternate use (multifamily, student housing, shelters) as exit strategies.
Capital Markets
Capital is concentrating on quality. Trophy urban and resort hotels see cap rate compression, multiple bidders, and access to debt. Midscale and economy hotels trade only with discounts or distress. Equity allocators tilt toward resilient luxury portfolios, expecting NOI growth and future liquidity, while marginal assets risk obsolescence.
Luxury RevPAR growth contrasts with flat-to-declining economy hotel performance.
Wage inflation and OpEx growth compress margins in midscale/economy.
Investors prefer trophy assets; weaker hotels face illiquidity or repurposing.
Bifurcation likely persists until middle-class spending power recovers.
🛠 Operator’s Lens
Luxury/upscale: reinvest strong cash flows into PIPs and service quality to sustain ADR premiums; secure group contracts while demand is robust.
Midscale/economy: optimize staffing models and cost controls; consider brand repositioning or alternative revenue streams; monitor franchise incentives closely.
The gap between luxury and economy will likely widen into 2026 unless real wage growth revives middle-class spending. Luxury’s outperformance should continue, bolstered by international inbound and group recovery, though not immune to recessionary shocks. If corporate travel budgets tighten, top-end hotels could see moderation, but structural demand for premium leisure experiences appears sticky.
Capital flows will favor luxury and lifestyle assets, while lower-tier hotels risk permanent demand loss or functional obsolescence. Expect more selective financing, higher reserve requirements, and elevated cap rate spreads at the lower end. The “haves” may set record NOI levels, while the “have-nots” confront a cycle of stagnation or repurposing.
Chart 1 – Hotel RevPAR Change YTD 2025 by Segment
Chart 2 – Average Daily Rate (ADR) % Change YTD 2025 by Segment
