Australia’s hotel sector now faces a tricky balance as travellers are back and occupancy is climbing, while the cost of adding new rooms has jumped sharply. Developers are dealing with the same pressures seen in residential construction, with more expensive materials, pricier labour and longer timelines making large city projects much harder to justify financially than they were just a few years ago.
Consultancy data shows the full build cost per hotel room, including construction and fit out, has climbed to about $830,000 in Sydney, roughly $795,000 in Brisbane and around $772,000 in Melbourne. With central business district land already tight and expensive, new city hotels are harder to make viable and the national development cycle that picked up around 2020 is now slowing. Only 2339 new hotel rooms were added in 2025, lifting total supply by just 1.3% to 135,579 rooms even as demand continues to strengthen.
Developers and international hotel groups are responding by shifting their attention away from the most expensive CBD locations and into regional and suburban markets where land is cheaper and projects can still stack up. At the same time, higher construction costs, tougher finance conditions, stretched labour availability and lengthy planning processes are making feasibility more sensitive than in previous years, so operators are placing more emphasis on careful capital use and brand positioning and on converting existing buildings rather than relying solely on ground up developments.
Even with fewer new hotels opening, the rooms that are already trading are getting busier. In 2025, average occupancies reached about 83.4% in Sydney, 80.9% in Perth, 77.3% in Melbourne and 75.7% in Brisbane, helped by a strong calendar of sporting and cultural events. These figures suggest the major city markets are edging towards capacity at peak times, which means hotels can lift prices midweek and during big events and push room rates higher without necessarily signalling a boom in profitability once higher operating and financing costs are factored in.
The tightening supply and solid demand are attracting serious investment capital. Recent deals include a luxury Melbourne hotel changing hands for around $205 million, a flagship Perth property selling a 50% stake for about $100 million and a landmark Queensland island resort reportedly fetching close to $1.2 billion. These transactions show that local and global investors still see strong long term value in Australian hotels even though the development environment is more challenging.
Looking ahead, the supply pipeline suggests modest but focused growth rather than a building surge. Research points to roughly 7272 hotel rooms currently under construction and due to open by 2028, with about 30% of that pipeline located outside the main city markets of Sydney and Melbourne. This shift towards regional and secondary locations looks likely to spread tourism spending more widely, although travellers wanting central city stays, especially during major events, should be prepared for tighter availability and steadily rising room rates over the next few years.
