Luxury has always been about ease: the seamless welcome, the perfect room, the staff member who appears exactly when needed and disappears just as gracefully. But behind the curtain, that seamless choreography is getting harder and harder to maintain.
Across the industry, the story of the past few years has been a familiar one: rate growth, but not enough. HVS’ 2025 report Hotel Profitability in Transition noted broad declines in gross operating profit margins, driven by increases in labour, operating standards and shared-service allocations, adding that “with ADR growth anticipated to flatten, revenue can no longer absorb rising costs.”
According to a CBRE analysis of U.S. hotels published in May 2025, hotel profit margins at both gross operating profit (GOP) and ebitda level declined in 2023 and 2024 because operating and ownership expenses increased at a greater pace than revenues, a trend expected to continue. Knight Frank’s UK Hotel Trading Performance Review also tells a similar story, a reminder that profit pressure is not a US-only narrative.
Although revenues are much improved post-pandemic, expenses are rising faster and this is creating tension, particularly in luxury operations. And while the luxury segment remains the clearest engine of demand and pricing power, it is also the segment where the cost of delivering the product has risen most visibly and where brand expectations and guest standards leave the least room to cut back without consequence.
Rising labour costs
Remember the staff members who make sure everything flows like a well-oiled, noiseless clock? In the luxury segment, they are the product. That personalisation and high-touch service depends on people but in today’s climate, labour has become more expensive – rightly or wrongly so depending on where you sit -, harder to find and more difficult to schedule efficiently around fluctuating demand.
CoStar and Tourism Economics’ hotel forecast update in late 2025 pointed directly at labour and department-level expense growth as a drag on margins. In its commentary, STR president Amanda Hite noted: “ADR is growing well below the rate of inflation, which in turn will put more pressure on margins”, also spotlighting “higher expenses especially in the F&B department as well as increased costs in other operated departments, marketing and utilities”.
It's clear that while luxury has pricing power, the cost base is climbing faster than pricing can reasonably absorb on a continued basis.
For luxury specifically, the problem is sharper. You can’t quietly reduce turndown, remove staff from public spaces, cut concierge service and strip out housekeeping detail without changing the guest experience. For luxury operators, this changes the playbook and pushes management teams toward more disciplined labour deployment, more deliberate service design and greater scrutiny of departments that once functioned as enhancers of guest experience but now read like margin liabilities.
Issues from the start
Luxury also feels the pressure at the development stage, where materials, labour rates and financing costs impact feasibility.
HVS’s 2025 U.S. Hotel Development Cost Survey noted that higher construction costs and expensive financing continue to weigh heavily on new hotel development activity, with lenders exercising caution and often requiring more equity alongside conservative underwriting. This can prove especially painful in luxury where design ambition and bespoke finishes can push budgets into eye-watering territory.
For example, for the U.S., HVS reports a median cost to develop luxury hotels at over $1,057,000 per room and notes that in its survey there were luxury developments where all-in costs exceeded $2 million per room.
This means that luxury owners and brands are forced into clearer choices: fewer keys with more space, stronger residential components or sharper positioning that can justify the rate premium needed to support capex-heavy builds. It also increases the temptation to lean into conversions and adaptive reuse because they can reduce risk and shorten time-to-market when the cost of waiting is itself expensive.
Control is key
Now you may be thinking: “So what’s the answer?” As noted above, it’s not in obvious cutbacks but rather in operational choices that protect the feeling of luxury while changing the mechanics underneath. This could mean tighter staffing models that still preserve “high touch” moments, rethinking F&B hours and concepts to reduce labour intensity without undermining a hotel’s social energy and rebalancing amenities toward those that drive clear ancillary yield such as wellness, experiences and premium private dining.
It could also mean more active ownership. HVS’s central recommendation for 2026 is governance and discipline. It argues that asset management needs to function as an active profitability check, benchmarking efficiency, testing assumptions and holding operators accountable for cost structure as much as revenue. In its framing, “protecting margin is the growth strategy.”
While luxury still has the strongest pricing power in hospitality, the segment’s competitive advantage is evolving from “we can charge more” to “we can design a product that converts revenue into profit more reliably.”
HVS’ report warns: “Rising costs are here to stay and rate growth alone will not restore margins. Profitability now depends on how efficiently hotels are managed, not how well they perform on the top line.”
In an environment dealing with higher labour, materials and operating costs, luxury hotels can no longer rely on demand alone to protect margins. According to the experts, the winners will be those that treat cost control as something that can coexist with - rather than undermine - the experience.