Ultra-luxury hotels, those with the highest room rates in their respective markets, are showing a strong rate premium over their luxury competitors, while their occupancy rates are significantly lower.
The global hotel industry is currently defined by a bifurcation between the high end and the limited-service hotels, where the performance of luxury hotels has outperformed. A similar bifurcation is at play within the luxury segment, where the 10 hotels with the highest average daily rate, or ADR, in each market are recording room rates that are often more than double the luxury class ADR.
Ever since the pandemic, the rapid rise in stock market and real estate values has disproportionately favored higher-income earners, and these consumers are spending part of their new wealth on travel experiences. In turn, hotels that cater to high-end travelers can charge high rates in exchange for the promise of unique locations, exclusivity and personalized service. While the definition of ultra-luxury is up for debate, in this context, we look at the aggregated performance of hotels with the highest ADR. This quantitative approach does not consider qualitative aspects, such as guests' satisfaction scores and a property’s sense of place.
The ultra-luxury ADR suggests that within the luxury class of properties, a few hotels stand out and can command significantly higher rates than their peers. In Paris, the 10 most expensive hotels have recorded an ADR of $2,600 this year, which is well over double the $922 ADR of the average luxury class hotel. Since $2,600 is the average, it implies that these hotels often charge between $3,000 and $4,000 per night during their busy periods. Additionally, the calculation is also skewed by the sale of suites, which can often be priced at $10,000 or more per night. This is also true in the Maldives, where the ultra-luxury ADR of around $2,600 is roughly 1.5 times higher than the luxury class ADR. In London, New York City and Rome, ultra-luxury hotels charge more than $1,500 per night, whereas the luxury class ADR ranges between under $500 in New York and around $800 in Rome.
The rates in ultra-luxury hotels have risen substantially in the years since the pandemic. Part of it was driven by the higher income of the clientele, but part of it was also likely driven by a new perception of high-end travel. When the borders and airspace reopened after 2020, U.S. consumers took advantage of a strong dollar and drove outbound demand for airlines and luxury hotels. Hotel operators spoke anecdotally about the strong, sustained demand for luxury rooms by American tourists in Paris, London and Rome.
Across the board, the occupancy for the 10 most expensive luxury hotels is much lower than the occupancy for their market’s luxury class hotels. This is likely caused by two main drivers: Higher-end hotels sell a sense of exclusivity, so a full hotel restaurant, a busy pool deck or a spa facility with limited availability runs counter to that perception. In addition, having availability allows hotels to serve their high-end clientele, who may give them little or no notice before arrival. Lower occupancies at this price point are therefore “a feature, not a bug.”
The high-net-worth individuals frequenting ultra-luxury hotels will likely continue to be somewhat insulated from the macroeconomic gyrations. This will likely continue to enable them to frequent the most expensive hotels around the world, allowing those hotel operators to exert continued pricing power. Occupancy is likely of secondary importance for these owners, who try to deliver unique service experiences in one-of-a-kind settings. Likewise, for their guests, access — not price — is the ultimate differentiator. Ultra-luxury hotels are likely to continue leveraging scarcity and exclusivity as their strongest competitive advantage.