A supply lag is fueling high occupancies and room rates in Australia’s leading hotel market as development challenges spiral.
Sydney is still one of Australia's strongest hotel markets, but development has become more complex.
“Construction, labor and financing costs are influencing what gets built and where, making conversions, repositioning and carefully selected new developments increasingly important," Matt Tripolone, IHG Hotels & Resorts’ managing director, Australasia and Pacific, said.
Tripolone said this dynamic is making investors more selective.
“Higher development and financing costs mean every project needs a very clear investment case. We are seeing more interest in existing assets that can be repositioned, alongside mixed-use projects and locations with several established demand drivers,” he said.
Craig Hooley, chief operating officer, Australasia, Minor Hotels, said the group had waited several years for one of Sydney’s best locations to become available for its Australian debut, the 256-room NH Collection Sydney set to open later this year as part of a mixed-use development on Wentworth St.
Quality assets, strong brands and locations are key, Tripolone added.
“Investors are naturally looking closely at areas supported by infrastructure, employment growth and good transport connections, as these can provide greater confidence over the long term. … There is also more focus on unlocking value from existing properties and including branded hotels within larger mixed-use and urban regeneration projects,” he said.
Anthony Ursino, chief operating officer and general counsel, Pro-invest Group, said Sydney’s investment appeal remains undisputed despite all the growth hurdles.
“What makes Sydney particularly compelling today is that the market’s strongest demand drivers continue to strengthen at exactly the moment new accommodation supply is becoming harder and more expensive to deliver. That combination is accelerating a shift toward conversions, more capital-efficient models, and innovative short and long-stay formats,” he said.
Market performance
Sydney’s hotel performance is cementing its position as Australia’s leading market, he said. In 2025, the market saw highs of 83% occupancy, 334 Australian dollars ($236) average daily rate and, up a record 9% in year-over-year terms, AUS$279 revenue per available room, according to Matthew Burke, regional director of Asia Pacific excluding China for STR.
“The momentum has carried into 2026,” he said. “For the year through June, Sydney recorded 81% occupancy and ADR of AUS$285, against 72% and AUS$248 nationally, with RevPAR growth of 8% … outpacing Melbourne (3%) and Brisbane (1%),” he said.
Burke agreed Sydney is thriving amid a supply lag.
“The whole Sydney market is performing well, helped by multi-faceted demand that is growing faster than the limited supply growth," he said.
CoStar’s market forecast for Sydney Center saw continuing ADR growth of 1.8% in the second quarter of 2026, while supply growth will stay slow ahead of a predicted 5.6% rise in 2028.
Burke said he believes Sydney operators are not cashing in “on the high absolute occupancy performance,” hence the conservative forecast for ADR growth over the next three years.
“Operators may need to accelerate the growth of ADR to maintain or grow their profitability in a higher inflationary environment," he said. "This will be countered by consumers’ ability or willingness to pay higher prices and whether that impacts demand over the long term.”
STR data shows a pipeline of 12 hotels under construction in Greater Sydney, with a further 23 in the planning stage, which, if all opened, would add more than 7,000 rooms to Sydney’s current inventory of 26,749 rooms.
Only 11 of those hotels are slated to open between now and the end of 2027, including the luxury Waldorf Astoria Sydney at Circular Quay and a Courtyard by Marriott in the Lower North Shore business hub of Crows Nest.
“Supply growth is very low in 2026 and lifts through the back half of 2027 and into 2028 with a few openings,” Burke said. “Sydney can certainly take more supply given the absolute occupancy level it trades at. The challenge for developers is how feasibility can match or beat other alternative asset classes, primarily residential."
Ursino puts Sydney’s current “structurally constrained supply picture” down to 25% to 30% spikes in development costs since 2019. He said this has throttled Sydney supply to just 1,230 rooms scheduled by 2028, “just 4.6% of existing inventory.”
Building costs are the biggest damper, according to business advisory Colliers, with a reported price tag of more than AUS$830,000 per room for upscale Sydney hotels.
Tighter financing conditions and labor shortages also are making new-build projects, particularly in Central Business District sites, increasingly difficult to stack up economically.
Nicholas Lower, managing director, hotel capital markets, Savills, said these hurdles were creating “highly competitive investment conditions.”
Hotels needed
While the gap between hotel demand and supply continues to sustain strong pricing and occupancy, the industry needs to fill the supply gap, IHG’s Tripolone said.
“Sydney continues to benefit from international travel, major events and a strong corporate base, while new hotel supply has moderated. This is supporting occupancy and ADR, but the city still needs the right accommodation in the right locations to support future growth and remain internationally competitive,” he said.
The recent transformation of Crowne Plaza Coogee Beach into the 198-room InterContinental Sydney Coogee Beach illustrates how repositioning can create significant new value, Tripolone said.
“The opportunity is also much broader than the CBD. … As Sydney grows, new projects reflect the diversity of demand across Greater Sydney," he said.
Beyond Sydney, IHG sees opportunity across the broader New South Wales growth corridor, Tripolone said.
“Markets such as Gosford and Newcastle are benefiting from population growth, infrastructure investment and increasing business activity but remain relatively underrepresented in terms of internationally branded accommodation,” he added.
Ursino said Pro-invest has seen an opportunity in the growing demand for blended short- and long-stay formats.
“Models that let an owner flex an asset between traditional hotel trading and longer-stay accommodation depending on how the market is moving represent a more resilient way to hold real estate through a cycle like this one,” he said.
As a hotel owner, developer, asset manager and operator, Pro-invest’s platform is built around that flexibility, Ursino said. Its latest acquisition, the 80-room Coogee Sands Hotel & Apartments, will be repositioned through adaptive reuse ahead of a forecasted opening by the end of the year.
“In a city where new supply is increasingly hard and expensive to deliver, existing assets with strong demand fundamentals offer a faster, more capital-efficient path to adding accommodation capacity than do ground-up development, while giving us the flexibility to apply short- and longer-stay operating models depending on demand,” he said.
For investors contemplating entering Sydney, Ursino said the message is simple.
“Sydney's combination of high occupancy, pricing power, constrained new supply and rising replacement costs makes existing assets — and the ability to convert, reposition and operate across flexible stay formats — the most compelling opportunity in this market right now," he said.