You must have enough extraordinary customers - by Joseph Aquino

For years, developers, hotel owners, luxury brands, and investors operated under a simple assumption: there would always be another wealthy customer.

As long as the product was exceptional, the buyer or guest would eventually appear.

That assumption helped fuel the construction of supertall residential towers, branded residences, luxury hotels, private clubs, and some of the most expensive real estate projects ever built.

Today, however, a different question is emerging.

Are there enough ultra-wealthy customers to support all of them?

After more than four decades in commercial real estate and observing luxury markets both in New York and internationally, I believe this question deserves serious consideration.

The issue is not whether wealthy people exist. They certainly do.

The issue is whether there are enough individuals willing to consistently spend at the highest levels of the luxury market.

There are many affluent consumers.

There are far fewer individuals willing to spend $20 million, $50 million, or $100 million on a residence.

Likewise, there are many successful travelers.

There are far fewer guests willing to spend several thousand dollars per night for a hotel room or tens of thousands of dollars for a luxury suite.

The distinction is important.

For much of the last decade, New York’s luxury residential market became a testing ground for this reality.

Developers raced to build increasingly ambitious projects aimed at the world’s wealthiest buyers. Towers such as 111 West 57^th St., Central Park Tower, and 432 Park Ave. were designed to attract a global clientele seeking trophy residences and unparalleled views.

The buildings themselves are extraordinary.

The challenge has never been the product.

The challenge has been the size of the buyer pool.

As prices increased, the number of qualified and motivated buyers decreased dramatically.

Many projects ultimately discovered that while there were plenty of wealthy people around the world, there were fewer buyers than expected willing to commit tens of millions of dollars to a single residence.

Luxury hospitality is beginning to face a similar reality.

The world’s finest hotels continue to command remarkable room rates. In many major gateway cities, premium rooms and suites routinely achieve rates that would have seemed unimaginable a generation ago.

Luxury travelers continue to seek personalized service, unique experiences, privacy, security, and exclusivity.

Yet room rates tell only part of the story.

Occupancy remains an important measure of demand.

A hotel can achieve extraordinary rates, but sustained success still requires a consistent flow of guests willing to pay those prices.

The market for travelers spending $500 per night is substantial.

The market for travelers spending $5,000 per night is considerably smaller.

The market for travelers spending $25,000 per night is smaller still.

At the highest end of the market, owners are often competing for the same limited group of global consumers.

This challenge extends beyond hotels.

Luxury retailers, private clubs, branded residences, luxury cruise operators, and ultra-high-end service providers are all competing for the attention and spending power of the same customer.

The competition is intensifying.

At the same time, the cost of creating and operating luxury products continues to rise.

Construction costs have increased dramatically. Labor costs have risen. Insurance costs remain elevated. Financing has become more expensive. Operating expenses continue to climb.

Owners are therefore under increasing pressure to generate higher revenues from a relatively small customer base.

This helps explain why many luxury operators are exploring new business models.

Some are incorporating branded residences into hotel developments. Others are introducing membership programs, extended-stay luxury accommodations, private clubs, wellness concepts, and mixed-use projects designed to diversify revenue streams.

These strategies recognize an important reality.

The luxury customer is valuable, but the luxury customer is also limited.

Major global events can temporarily expand demand.

The FIFA World Cup, the Olympics, Fashion Week, the U.S. Open, international conferences, and major cultural events all bring waves of affluent visitors to major cities.

These events often generate headlines about record room rates and extravagant hospitality packages.

However, investors and owners must ultimately evaluate performance over an entire year rather than a single week.

The fundamental question remains the same.

How large is the addressable market?

How many consumers are willing to spend at the highest levels of luxury on a recurring basis?

As more luxury products enter the marketplace, the answer to that question becomes increasingly important.

None of this suggests that luxury hospitality or luxury residential development is in trouble.

Quite the opposite.

The luxury sector remains one of the strongest and most resilient segments of the global economy.

The wealthiest consumers continue to travel, invest, dine, shop, and acquire real estate.

The opportunity remains significant.

But opportunity should never be confused with unlimited demand.

Every market has a ceiling.

Every product has a customer base.

The most successful owners, developers, and investors will be those who accurately understand the difference.

The lesson is simple.

Building an extraordinary product is not enough.

You must also have enough extraordinary customers.

That may prove to be one of the defining challenges of luxury real estate and hospitality during the decade ahead.

Joseph Aquino is president of JAACRES, Manhattan, N.Y.