Tourists and business travellers alike hit the road again last year, boosting demand for hotel rooms by 11 per cent Canadawide.
But new construction has been virtually non-existent, with the stock of rooms growing less than one per cent last year even as travellers have shown they’re willing to pay. Spending on accommodation was 97 per cent of 2019 levels in the first half of last year, while overall tourism spending was at 88 per cent – showing that even if travellers are skimping on activities, they’re willing to pay for comfy quarters.
Alberta has so far been the big winner. Banff is back to normal, with Innvest Hotels’s purchase in 2022 of a leasehold interest in the 99-room Royal Canadian Lodge and 65-room Charltons Banff trumped last year by Oxford Property Group’s $170 million purchase of the community’s 330-room Rimrock Resort Hotel, its first hotel acquisition since 2014.
“Our acquisition of the Rimrock speaks to our long-term conviction in Canada’s luxury resort hotel market,” Tyler MacDonald, head of hotels and alternatives at Oxford Properties, said at the time.
Oxford has plans to renovate the Rimrock, one of several renovations in town. The Hotel Canoe and Suites opened following a redevelopment of its predecessor the Inns of Banff, while the Moxy replace the former Voyageur Inn.
Calgary is also buzzing, Carrie Russell, senior managing partner with HVS Canada told the Western Canadian Lodging Conference on November 2.
“Calgary’s going to grow at slightly greater than the national average,” she said, following on 12% rate growth last year and setting the stage for ongoing investment.
PBA Group changed tack on plans for 833 4th Avenue SW, an office property originally proposed for residential, and now plans a 226-room extended-stay hotel under the Element brand.
An expansion that will bring the BMO Centre to a million square feet will complete this year, making it the largest events centre in Western Canada. A new $1.2 billion facility replacing the iconic Saddledome is also set to break ground this year.
Both projects promise to fuel additional room demand, as well as calls for new construction so the city can land the events needed to fill the new space.
Vancouver is also seeing new proposals coming forward after a years-long hiatus, with four projects proposed for downtown. Pointing to the opportunities, the city recently logged its biggest hotel transaction since the pandemic with the sale of the 718 Drake Street, a former student residence now operating as the Grand Park Hotel and Suites Downtown Vancouver.
Diversification is a prime goal of investors looking at hotels right now, according to speakers at the Western Canadian Lodging Conference in Vancouver on Nov. 2.
“The last 12 to 24 months as we’ve come out of the recovery, we have seen an uptick in investors that generally haven’t participated in the space,” said Duncan Chiu, senior director, lodging development, for Western Canada with Marriott International. “A lot of investors are really surprised at the resilience of the industry, the resilience of the customer.”
While operating and borrowing costs have increased, Chiu said the hotel asset class is different from the multifamily, industrial or office classes in that rents can be repriced on a daily basis, and sometimes multiple times a day.
“That’s really been able to combat some of these inflationary cost pressures,” he said.
The dynamic has also attracted the interest of lenders, who are willing to support operators with good track records or able to muster the expertise needed to operate hotels.
“It’s a product of the overall economy, where multifamily deals are challenged, industrial cap rates are not what they were two years ago,” said Trevor Scott, managing director, Western Canada, with CFO Capital. “We're getting calls from the institutions looking for distribution of capital into the hospitality space. … All of the participants that were around before COVID are now back and really interested in the hospitality space because the performance has been very strong over the last 24 months. So there's a lot of positivity and momentum in the hotel sector.”
However, higher interest rates – now running five to 10 per cent – have made lenders take a closer look at potential deals. Loan to value ratios have come down, with CFO recently concluding deals as low as 50 per cent.
“There is a heightened scrutiny when you're looking at deals, when you're looking at borrowers, when you're structuring deals,” he said.
Many are in the 60 per cent range, said Jason Wight, managing partner with Icon Capital Finance, depending on the quality of the asset and the ability of cash flow and the borrower to service debt.
“There’s still a lot of interest in the hotel investment, and there's significant money on the side, capital available to be deployed,” Wight said. “It’s probably easier to find an equity partner on a hotel deal now than it was in 2019, 2018, just because of the amount of liquidity that's out there. That might change over the next year, but right now, there's a lot of interest in the hotel space.”
Opportunities for investment are also presenting themselves, in part as the sector repositions for a new cycle.
“A lot of owners have not put money back into their hotels in the last six, seven years, and now it’s the time,” Hamir Bansal, senior vice-president with Colliers Hotels, told the conference. “That’s a challenge for a lot of owners.” While the wave of distressed assets anticipated four years ago has not happened, Bansal said there are properties for sale at less than replacement value. He had six properties under contract at the time of the conference, in Alberta and northern 小蓝视频 because the existing owners chose to sell to groups with the wherewithal to take them forward.
“The only reason they’re under contract is because investors are coming out to these assets and saying, ‘Yes, we can turn them around, we have management experience,’” Bansal said.
These are the kinds of deals that jazz Wight, who believes the year ahead will bring plenty with lenders tapped to help purchasers and owners allocate financing to different activities in a way that makes sense.
“We're in a market in Western Canada where there's going to be great opportunities to buy aging assets at a discount to replacement cost,” he said. “With the plethora of friends all the owners have access to, [they] can do a lot of really neat upbranding, repositioning plays.”
But with the shifting interest rate environment, investors will need to think ahead.
“The process of financing and pulling a deal together is much longer than it used to be. There's just so many components that are slower than they used to be,” said Cameron Woof, assistant vice-president, hotels and syndication, with CWB Franchise Finance. “Start sooner than you think you would need to pull a deal together.”
But investors shouldn’t jump the gun, either. With interest rates set to be lower by the end of the year, anyone who doesn’t need to refinance or renew their debt immediately should be ready to sign, but not complete the deal until needed.
“It's going to get better, it's stabilizing,” he said. “So the longer you wait for that renewal, likely the better the interest rate will be when you get there.”
