Australia's hotel sector faces a supply crunch as build costs soar
Skyrocketing construction costs are putting the brakes on new hotel development across Australia's major cities, with developers warning the squeeze will drive up room rates at existing properties as new supply dries up.
According to consultancy RLB, bringing a new hotel room to market in Sydney now costs up to $830,000 when construction, furniture, fixtures and equipment are factored in. The bill runs to $795,000 per room in Brisbane and $772,000 in Melbourne — figures that are making it increasingly difficult for developers to justify new city projects.
Quest Apartment Hotels' managing director David Mansfield said CBD development has become almost untenable in financial terms. "The cost to develop a property in a city CBD at the moment is just so expensive," he told the Australian Financial Review (AFR), noting that Melbourne's relatively strong existing supply compounds the challenge further.
The numbers back him up. Just 2,339 new hotel rooms entered the national market in 2025, representing a 1.3 per cent lift in total supply to 135,579 rooms, according to Colliers research. Melbourne led the way with just over 1,000 net new rooms, followed by Sydney — modest figures for two of the country's busiest tourism and business travel markets.
IHG Australasia's managing director Matthew Tripolone pointed to a convergence of pressures making new projects harder to get off the ground: elevated construction costs, tight financing conditions, labour shortages, and slow planning approvals. He noted that feasibility calculations are now far more sensitive than in previous cycles, demanding stronger capital discipline and more precise brand positioning.
As the pipeline slows, occupancy rates are climbing. Sydney recorded 83.4 per cent occupancy in 2025, with Perth at 80.9 per cent, Melbourne at 77.3 per cent and Brisbane at 75.7 per cent. Colliers' Karen Wales told the AFR that markets are approaching capacity during peak periods, particularly around major sporting and cultural events, creating conditions for continued rate growth.
Despite the development challenges, investor appetite for existing assets remains strong. Thai hospitality group KS Hotels acquired the Park Hyatt Melbourne for around $205 million, while a 50 per cent stake in the Ritz-Carlton Perth changed hands for approximately $100 million. Most notably, US private equity firm Blackstone purchased Hamilton Island resort from the Oatley family for a reported $1.2 billion.
Mansfield cautioned that rising room rates shouldn't be mistaken for a healthy industry. Operating cost pressures are eroding margins even as revenues tick up, he said — a dynamic that is reshaping where developers choose to build. Quest has pivoted toward regional and suburban locations such as Southport on the Gold Coast and Ringwood in Melbourne's east, where land and construction economics are more workable.
Looking ahead, Colliers has tracked around 7,272 rooms currently under construction and due to open by 2028, with roughly 30 per cent of that pipeline located outside the major capital cities — a sign that regional Australia may drive the next phase of hotel growth.
Jonathan Jackson, 23rd February 2026
