Is Riyadh Overinvesting in Luxury Hotels While Leaving a Gap in the Midscale Segment?

Riyadh is undergoing one of the most significant urban, economic and tourism transformations in the region.

The city is no longer simply Saudi Arabia's political and administrative capital. It is increasingly developing into a regional centre for business, investment, events and entertainment, supported by major projects, corporate expansion, a growing meetings and events sector, and preparations for global events such as Expo 2030.

Naturally, this transformation is reshaping Riyadh's hospitality market.

New hotels are opening, international brands are expanding, mixed-use developments increasingly include hospitality components, and a growing pipeline of hotel rooms is expected to enter the market over the coming years.

But behind this growth lies an important investment question:

Is too much of Riyadh's new hotel investment being directed toward the upper end of the market while a different opportunity may be emerging in midscale and business hotels?

The answer is not simply about how many hotel rooms Riyadh needs.

It is about what type of rooms the city needs, who will stay in them, how much they cost to develop, and whether they can generate an appropriate return on invested capital.

What Do Riyadh's Numbers Tell Us?

According to Knight Frank and STR Global data, Riyadh's quality hotel supply stood at approximately 24,738 rooms in Q1 2025.

More important than the total number of rooms, however, is how that supply is distributed.

All figures in the table above relate specifically to Riyadh and should not be interpreted as Saudi Arabia-wide figures.

Based on the published segmentation, Luxury, Upper-Upscale and Upscale hotels collectively represent approximately 72% of Riyadh's quality hotel supply, while Midscale accounts for around 12%.

These figures do not, by themselves, prove that Riyadh has a shortage of midscale hotels.

But they raise an important question:

Does the current and future hotel supply mix reflect the type of demand being created by Riyadh's economic transformation?

Knight Frank forecasts also indicate that Riyadh's quality hotel supply could approach 30,000 rooms by 2027.

The question, therefore, is no longer simply:

How many more hotel rooms does Riyadh need?

It is:

What type of hotel rooms does Riyadh need?

Riyadh Is Not Growing as a Tourism Destination Alone

A significant part of Riyadh's transformation is economic and corporate rather than purely tourism-driven.

Corporate expansion, regional headquarters, major public and private projects, consultants, contractors, exhibitions, conferences and international events all create different forms of accommodation demand.

A Riyadh hotel guest may be a senior executive staying for two nights.

A consultant working on a project for several weeks.

An engineer or specialist attached to a major development.

An exhibition or conference participant.

A domestic traveller visiting Riyadh for business or an event.

Or an employee requiring accommodation for several weeks or months.

Not all of these guests require a luxury hotel experience on every trip.

When Most Supply Is Concentrated at the Upper End

It is entirely logical that Riyadh attracts some of the world's leading hotel brands.

The strength of the market, scale of development and growth of business and tourism make the city an attractive destination for Luxury and Upper-Upscale operators.

Developers may also prefer luxury brands because of the marketing value they can add to mixed-use developments and branded residential projects.

But brand strength does not automatically make a luxury hotel the right product for every location.

When approximately 72% of existing quality supply is already concentrated in Luxury, Upper-Upscale and Upscale segments, investors should ask:

Is demand for these segments growing as quickly as supply?

And equally:

Are some demand segments growing faster than the hotel supply designed to serve them?

This is where Midscale, Business Hotels, Select-Service and Extended-Stay products deserve closer examination.

The Wider Saudi Context

Riyadh is not isolated from the broader direction of Saudi Arabia's hospitality market.

Knight Frank's 2026 updates indicate that more than 100,000 hotel rooms are at various stages of development across the Kingdom, with a significant proportion of future supply continuing to target upper hotel categories.

These figures refer to Saudi Arabia as a whole, not Riyadh specifically.

This does not mean investment in luxury hospitality is misplaced.

Saudi Arabia is developing global destinations, targeting higher-spending visitors and building an international hospitality ecosystem in which luxury brands have an important role.

However, the concentration of investment at the upper end also makes less represented segments worth examining.

Could Midscale Be Riyadh's Next Gap?

A 12% Midscale share alone does not prove that the market is undersupplied.

But combined with Riyadh's economic transformation and increasingly diverse sources of demand, it makes the segment worthy of serious investment analysis.

A midscale hotel is not simply a cheaper version of a luxury hotel.

It represents a different development and operating model.

A well-designed Business or Select-Service hotel may require fewer public areas, fewer food and beverage outlets, a more focused service offering, a simpler operating structure and fewer employees per key than a luxury Full-Service hotel.

This can potentially deliver:

• Lower Development Cost per Key.

• Greater space efficiency.

• More keys within the same development area in certain projects.

• Lower Operating Costs.

• A room rate accessible to a broader demand base.

Most importantly:

A lower ADR does not necessarily mean a less attractive investment.

The Highest ADR Is Not Always the Best Investment

Investors can easily fall into the trap of judging hotel performance primarily by room rate.

A luxury hotel may achieve a significantly higher ADR and therefore appear to be the superior investment.

But investors do not invest in ADR.

They invest in returns.

A Luxury hotel may achieve a higher room rate, but it can also require substantially higher development cost per key, larger rooms and public spaces, more restaurants and facilities, more expensive FF&E, greater staffing requirements and higher operating and maintenance costs.

A Business or Midscale hotel may generate a lower ADR while operating with a much more efficient capital and cost structure.

The full equation should therefore include:

ADR + Occupancy + RevPAR + GOP + Development Cost + Operating Cost + ROI

The right question is not simply:

How much can we charge for the room?

It is:

How much capital have we invested in that room, and how much profit and cash flow can it return?

Even a Strong Market Can Experience Pressure

In Q1 2025, Riyadh's quality hotel market recorded approximately:

ADR: SAR 890

Occupancy: 60.3%

RevPAR: SAR 537

Compared with the same period a year earlier, ADR declined by approximately 8.2%, while RevPAR declined by around 17%.

These figures do not suggest that Riyadh is a weak hospitality market.

The city's long-term fundamentals remain strong, and hotel performance can fluctuate for many reasons.

But they illustrate an important investment principle:

Strong city-level growth does not mean the market can absorb every hotel product, at every price point, in every segment.

As supply increases, segment-level Supply & Demand analysis becomes increasingly important.

Extended-Stay Could Be Part of the Opportunity

Another segment deserves particular attention in a city experiencing Riyadh's scale of corporate and project-driven growth:

Extended-Stay.

Not every business traveller stays for two or three nights.

Consultants, engineers, managers and employees attached to major projects may require accommodation for several weeks or months.

These guests require a different product: practical living space, services suitable for longer stays, proximity to work and a more efficient rate structure for extended accommodation.

This creates potential opportunities for:

Extended-Stay Hotels

and

Serviced Apartments

alongside traditional hotel development.

Midscale Does Not Automatically Mean Successful

A potential opportunity in Midscale does not mean that every 3- or 4-star hotel developed in Riyadh will succeed.

Riyadh is a large market made up of multiple submarkets.

A hotel near a financial or business district does not necessarily serve the same guest as one near an exhibition centre, industrial district, entertainment destination or emerging residential community.

Every site therefore requires its own feasibility analysis.

The first question should not be:

Luxury or Midscale?

It should be:

Who is the guest we expect to stay here?

Start With Demand — Not the Brand

Some hotel developments begin with the brand.

"We want an international brand."

Then:

"We want a five-star hotel."

Only afterwards does the feasibility analysis begin.

A stronger investment process often works in the opposite direction.

Start with the market.

Who is the guest?

Why are they coming to this location?

How long will they stay?

How much can they pay?

Is their company paying for the room?

Do they genuinely need a spa, ballroom and multiple restaurants?

Or do they primarily need a good room, breakfast, fast internet, a gym, workspace and limited meeting facilities in the right location?

Only then should the developer determine the Concept, Segment, Brand and Operator.

Market → Demand → Concept → Segment → Brand

Not the other way around.

What Should Investors Analyse Before Developing a Hotel in Riyadh?

Citywide ADR and Occupancy are not enough.

Investors should analyse the specific Micro-Market around the proposed development, including:

• Existing competitors.

• Future hotel pipeline.

• Incoming hotel segments.

• Corporate demand.

• MICE demand.

• Leisure demand.

• Government demand.

• Long-Stay demand.

• Average length of stay.

• Weekday versus weekend pricing behaviour.

• Development cost per key for each potential concept.

Different scenarios can then be tested:

Luxury Full-Service

Upscale

Upper-Midscale

Midscale Select-Service

Extended-Stay

Serviced Apartments

The feasibility study may ultimately point toward a very different product from the developer's original assumption.

The Real Gap Is Not Always About the Number of Rooms

When discussing a Hotel Supply Gap, the obvious question is:

How many rooms does the market need?

But a more important question may be:

What type of rooms does the market need?

Thousands of new rooms can enter Riyadh and an investment opportunity may still exist if most of that supply targets a different customer from the segment where demand is growing.

Hotel supply therefore needs to be analysed not only by room count, but by:

**Segment

Location

Price Point

Demand Generator

Length of Stay

Operating Model**

This is where the real gap may emerge.

Is Riyadh Overinvesting in Luxury Hotels?

It may still be too early to answer with a definitive yes or no.

Riyadh undoubtedly needs luxury hotels and will remain one of the region's most important markets for international high-end hospitality brands.

But when approximately 72% of the city's quality hotel supply is concentrated in Luxury, Upper-Upscale and Upscale categories, while Midscale represents around 12%, the question deserves serious consideration.

Will demand continue to absorb this concentration at the upper end?

Or will Riyadh's economic transformation create a stronger opportunity for:

**Midscale Hotels

Business Hotels

Select-Service Hotels

Extended-Stay Products**

Not simply because they cost less to develop.

But because they may be better aligned with an important part of the real demand being created by the city.

Ultimately, successful hotel investors are not necessarily looking for the hotel that achieves the highest ADR.

Or the most famous brand.

Or the highest star rating.

They are looking for the product that creates the strongest balance between:

Demand + Development Cost + Operating Efficiency + Return on Invested Capital.

Perhaps the biggest hospitality opportunity in Riyadh over the coming years will not be building the most luxurious hotel.

It may be identifying the segment where demand is growing faster than supply — and developing the most efficient product to serve it.