Table of Contents

1. Key Highlights:
2. Introduction
3. The Divergence in Hotel Performance
4. Consumer Spending Patterns in Travel
5. Investment in Luxury Hospitality Assets
6. The Impact of Economic Policy on Hospitality Investment
7. The Future Outlook for Hospitality

Key Highlights:

• The luxury hotel market is experiencing significant growth while mid-market and economy segments are in decline, reflecting a widening gap in consumer spending habits.
• Analysts predict continued performance gains for high-end hotels as affluent travelers prioritize experiences and luxury over everyday goods, even amidst economic uncertainty.
• Investment activity in the hospitality sector continues, albeit focused primarily on luxury assets due to the restricted appetite for mid-tier properties.

Introduction

As inflation continues to linger and the job market shows signs of weakening, a curious disparity is emerging in American consumer behavior: while many people are cutting back on travel, the wealthy remain undeterred. The luxury travel sector is thriving, leading to an increasingly pronounced division in the hospitality industry. This article explores the forces behind the growing performance gap between high-end hotels and their more economically accessible counterparts, the shifting consumer priorities driving these trends, and the implications for investors and the hospitality market moving forward.

The Divergence in Hotel Performance

The stratification within the hospitality sector has never been more apparent. According to recent findings, luxury hotels are the only lodging segment to report gains in 2025, a year marked by turbulence in other areas of the economy. This trend is ascribed to the fact that affluent consumers are increasingly spending their money on experiences rather than material possessions. Specifically, the luxury segment has achieved a remarkable 3% increase in both Average Daily Rate (ADR) and Revenue Per Available Room (RevPAR) by July 2025, as detailed by data from CoStar. In contrast, the lower segments of the hotel industry, particularly economy hotels, have suffered declines in both metrics, with ADR down by 0.8% and RevPAR decreasing by 1.9%.

The CEO of LW Hospitality Advisors, Daniel Lesser, underscores this growing bifurcation: "The rich are getting richer, the poor are getting poorer, and the middle class is getting squeezed out," he said. This statement resonates with the experiences of travelers across different income brackets. Those with the means continue to embark on luxurious vacations, while those facing financial constraints are left to reconsider their travel plans.

The luxury consumer's preference for immersive, meaningful experiences has not gone unnoticed. Companies like McKinsey & Co. and Bain & Co. indicate a broader trend where affluent consumers are directing their discretionary spending towards travel and luxury experiences rather than traditional luxury goods like handbags and watches. Their findings reveal that this market segment is expected to maintain a robust trajectory, especially as consumer confidence improves.

Consumer Spending Patterns in Travel

Travel now sits at the intersection of luxury and experience for many affluent consumers. A report from Preferred Hotels & Resorts highlights that the typical luxury traveler is planning an average of eight vacations in 2025. Furthermore, a striking 55% of surveyed individuals expect to increase their travel expenditure this year. Nearly 30% are willing to spend more than $50,000 on travel alone.

At the same time, a survey by LendingTree reveals a stark contrast among the general population, with over half of U.S. consumers indicating plans to reduce their travel amid ongoing economic uncertainty. This duality emphasizes the growing divide not only in wealth but also in lifestyle choices as the perceived luxury of experiences over tangible goods becomes more apparent.

The affluent customer base remains resistant to price fluctuations and economic pressure, as noted by Host Hotels & Resorts CEO Jim Risoleo. He mentioned during a recent CNBC interview that his properties are experiencing no rate resistance, reflecting a robust willingness to spend among wealthy travelers. The luxury hotel market's ability to avoid declining average daily rates in a time when many are pulling back on travel indicates a unique resilience and a shifting consumer ideology towards prioritizing experiences.

Investment in Luxury Hospitality Assets

The disparity in performance across various lodging segments has significant implications for investment opportunities within the hospitality industry. Despite a broader slowdown in hotel transactions, the luxury segment persists as a beacon of possibility. Buyers are gravitating toward high-end properties, turning their backs on mid-market options, which are presently less appealing for investment.

Transaction activity within the hotel market reflects this trend, with $25 billion spent across 600 hotel transactions in the first half of 2025. Although this marks a year-on-year decline of approximately 17%, the average price per key rose by 2.5% to $241,000. Notably, 20 transactions exceeded $1 million per room, highlighting the increased interest in high-value assets. The JW Marriott Phoenix Desert Ridge Resort & Spa, for instance, was sold for $865 million, equating to $910,000 per room.

Market analysts believe that transaction volume is likely to experience an uptick as the macroeconomic landscape improves. Expectations are set on the Federal Reserve potentially cutting interest rates, which could result in lower borrowing costs for investors. This anticipated shift may broaden the pool of potential buyers and accelerate sales of luxury properties. However, the appetite for prime mid-market investments remains tepid, a trend that has persisted through the first half of the year.

The Impact of Economic Policy on Hospitality Investment

On a corporate scale, economic policies and regulations will significantly influence the hospitality sector moving forward. The recent passage of new tax legislation, often referred to as President Donald Trump’s One Big Beautiful Bill Act, is expected to provide more clarity on tax and federal policies, potentially impacting investment strategies across the hospitality industry.

This development may help to bridge the gap affecting hotel values and investor interest. Currently, many Real Estate Investment Trusts (REITs) trading publicly are exposed to substantial discounts—more than 20% off the net asset value by the end of July. There is a growing sentiment among industry experts that some high-value assets are being underpriced within public stock markets, leading to acquisitions of luxury hotels by private entities.

One notable example includes Braemar Hotels & Resorts, which has announced its intention to seek a buyer for its portfolio of luxury hotels amid pressures from activist investors. Such actions underline the volatility within the segment and demonstrate that even in a burgeoning luxury market, significant challenges persist due to external economic pressures.

The Future Outlook for Hospitality

The projections for the luxury hotel sector remain cautiously optimistic. Experts foresee that as the economic environment stabilizes, propelled by anticipated monetary policy adjustments, transaction activity will become more robust across all levels of the hospitality sector. The increased clarity in economic policy will facilitate investment decisions, restoring some confidence in broader market segments that have been underperforming.

As Daniel Lesser aptly noted, while the mid-market does face challenges, it is not disappearing. "It's going through some pain right now," he stated, reinforcing the idea that the hotel market will always have cycles and shifts. High-end assets will continue to attract keen investor interest, and entities willing to navigate the financial complexities may find opportunity even in less stable markets.

FAQ

1. Why are luxury hotels outperforming other segments? Luxury hotels are benefitting from increased spending among affluent consumers who prioritize travel experiences over material goods. This market is less sensitive to economic fluctuations compared to mid-market segments.

2. How is the middle class affecting travel trends? The middle class is increasingly feeling the squeeze of inflation and economic uncertainty, leading many to cut back on travel plans, contrasting sharply with the affluent segment.

3. What factors could boost investment activity in the hospitality sector? A potential cut in interest rates by the Federal Reserve may lower borrowing costs, incentivizing more investment in the hospitality sector, particularly within the luxury market.

4. How do current economic policies impact hospitality investments? Changes in government policy, like tax reforms, create a clearer investment landscape for stakeholders. This can lead to increased confidence and, ultimately, more transactions across different market segments.

5. Can the mid-market hospitality segment recover? While the mid-market segment is currently underperforming, it remains a vital part of the hospitality landscape. It has the capacity for recovery as the overall economic situation stabilizes and spending habits evolve.

This intricate interplay between wealth, consumer behavior, and economic policy will continue to define the future of hospitality. Understanding these dynamics equips industry stakeholders to navigate opportunities in both high-end and mid-market segments moving forward.