Are London’s economy hotels becoming too expensive?

Data from commercial real-estate data company CoStar has revealed that economy hotels are now more expensive than some midscale hotels in certain areas of London. This trend is a sign of London’s rising affordability challenges. However, in submarkets where prices for mid-tier hotels are slightly higher than economy rooms, the premium is an average of just under 10%. This means that independent mid-scale hotels in desirable areas like Soho, Bayswater and Paddington have an opportunity to price themselves competitively against economy hotels, offering travellers more for their money and effectively undercutting the economy hotel sector.

Why has this trend occurred?

The overall hotel market in London has struggled to drive pricing, with average daily rates posting year-over-year losses. Economy hotels have suffered the most, with ADR decreasing 5.5% annually, as occupancy also dipped by nearly 3%, resulting in an 8% drop in RevPAR. Alongside this, costs are rising.

Data from accountancy firm RSM showed that year-on-year, hotel’s payroll costs as a percentage of revenue increased from 38.8% in January 2024 to 39.6% in January 2025 in the UK, and from 36.8% to 37.7% in London. Overall, total hotel payroll costs as a percentage of total revenue rose from 28.8% in December 2024 to 39.6% in January 2025 for UK hotels, and from 25.4% to 37.7% for the London market. This was before staffing costs increased as a result of changes to National Living Wage and employer National Insurance contributions. This means that many hotels are unable to reduce room rates if they want to turn a profit, but are facing consumer pressure to do so.

Cristina Balekjian, director of hospitality analytics, UK, CoStar Group, believes that some branded economy hotels are taking advantage of their brand to charge higher prices. She states that brands such as Premier Inn or Ibis are using the awareness and penetration that comes with their name to market themselves more effectively than midscale independent hotels that may offer better value for money.

However, Balekjian thinks that this offers many midscale hotels an opportunity to drive occupancy and revenue, as they are offering much more for the price compared with some economy hotels, all that is missing is brand visibility. If these kinds of hotels are able to market themselves well and show the value they are offering compared with others then they will be able to eat into the market share currently held by bigger name brands. To do so these hotels must communicate that they can often offer better, larger rooms with more amenities than an economy hotel. Some independent hotels will also be able to offer a more personalised customer experience compared to the cookie cutter offering from a branded hotel.

How can the economy sector fight back?

All is not lost for the economy sector. While it seems that prices may have hit their floor, there may be no need to lower them much further. Balekjian speculates that as we enter the summer months, midscale prices may rise. The summer may also bring more international visitors, a class of traveller which is not as affected by hotel price rises as the cost of an international holiday is already high meaning an increase in accommodation is less likely to put them off compared to a domestic tourist. According to her, if the macro-economic picture and consumer confidence continue to improve over the next year or so, midscale and higher properties will put their prices up, making economy hotels look more competitive by comparison.

The sector could also get much-needed government support. According to Newmark, business rates for mid-to-upscale hotels are set to rise by 220%, while budget properties face an even steeper 290% increase, impacted by rising wage costs. Some kind of relief from Parliament would reduce the pressure on the bottom line, potentially allowing some hotels to adopt more competitive pricing. “The government will have to bring in transition relief, but at the minute, it hasn’t made a decision yet what that percentage is. The government needs to have that as low as possible, because you cannot start hitting wages and business rates at the same time,” says Will Kirkpatrick, head of hotels and extended stay at Newmark.

Is London pricing out domestic tourists overall?

This is the more existential threat to economy hotels in London, as it is not just the price of hotels that have risen. The price of everything included in a trip, ranging from food and entertainment to tourist attractions, have soared.

There is also no danger of the luxury sector being hit. Balekjian states that its client base are much more resilient to economic trouble owing to their large wealth. She also states that higher-end hotels are more attractive to foreign tourists than they are to domestic ones. This is evidenced by the fact that luxury hotels were the only class to achieve year-over-year RevPAR growth during the first quarter of 2025.

“Inflationary pressures don’t tend to affect luxury travel as much and demand has continued to grow despite supply addition so that gives those properties a little bit more leeway in terms of driving average daily rates. because there is the demand they can play a little bit more with driving occupancy rather than rate, and that offsets any loss,” she says.

Despite this, Balekjian believes that domestic demand for stays in London will remain but possibly in a more limited or seasonal form. She thinks that London still offers things that no other city in the UK does, such as its theatres and events, and that will drive demand. Rather than stay away or go somewhere else Balekijan expects that domestic tourists will likely be more careful with their trips to the capital, only travelling in less busy seasons or staying fewer nights overall, as a way to offset the ever-increasing cost of visiting the city. This means that hotels in London may have to adapt their offering to suit the changing market if they want to survive.