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Canada’s hotels face another challenging year in 2022: CBRE

Domestic tourism is expected to be up almost 19 per cent this year over 2020, according to the Co...

IMAGE: CBRE Hotels director Nicole Nguyen. (Courtesy CBRE)

CBRE Hotels director Nicole Nguyen. (Courtesy CBRE)

Domestic tourism is expected to be up almost 19 per cent this year over 2020, according to the Conference Board of Canada, and leisure and resort destinations have been the biggest beneficiary.

However, 2021 will still be considered pretty much a lost year for the Canadian hotel industry. The first part of 2021 was hampered by lockdowns and restrictions, the Canada-United States land border didn’t open to American travellers until August and international travel restrictions have still only been partially lifted.

That meant there wasn’t much of a summer season — which has historically been important for momentum in the Canadian hotel industry.

This is reflected in CBRE’s 2022 market outlook for the Canadian accommodation sector, which forecasts Vancouver to outperform other Canadian markets by most measures in the coming year. Occupancy is projected to hit 55 per cent, the average daily rate to rise to $176, and revenue per available room (RevPAR) to increase to $97. That’s up from $47 in 2020, but still well shy of $175 in 2019.

Niagara Falls is projected to have 2022 occupancy of 59 per cent, the highest of any market in Canada, but still down eight points from its 2019 level. CBRE forecasts Quebec City will see occupancy of 55 per cent, outperforming its provincial counterpart in Montreal.

Leisure markets and resort areas benefit most

“Those markets in particular are more heavily leisure-focused and see a greater proportion of their demand come from the leisure business,” CBRE Hotels director Nicole Nguyen told RENX.

“Leisure-focused destinations have started their recovery earlier than many of our other markets. As soon as restrictions were lifted, people weren’t necessarily ready to travel for business due to company policies or whatever, but they were definitely ready to go on a vacation of some sort.”

Resort destinations across the country where there are outdoor summer or winter activities benefited most.

Nguyen cited areas around national parks and place such as Jasper, Banff, Whistler, Mont-Tremblant, the Laurentians and Muskoka, as well as the wine regions of Prince Edward County, Niagara and Okanagan, as examples.

Lack of business travel hurts

Urban downtown hotels saw a sharp falloff in RevPAR as COVID-19 set in and have remained at the bottom of the performance chart.

CBRE projects all 13 of Canada’s major hotel markets will continue to have RevPAR under $100 in 2022, with Vancouver at $97, Montreal at $79 and Toronto at $78. The last time all of those markets were under $100 was in 2010, in the midst of the global financial crisis.

CBRE forecasts 2022 RevPAR will increase 53 per cent to $72, but says recovery to 2019 levels likely won’t occur until 2025.

A more complete industry recovery will depend on the return of American travellers and a resurgence in business travel, meetings and conferences, which is projected to begin ramping up in the spring of 2022.

“We are believers that business travel will come back to levels reached previously, but it may be a different type of business travel,” said Nguyen.

Instead of flying in and out of a city for a one-day meeting, Nguyen believes people may stay longer and try to conduct more business while they’re there.

She noted there are fewer flights operating and it takes longer to get through airports due to COVID-19 health protocols, which is also putting some people off from business travel.

“We think business travel will come back, but it will take time and we’ll have to be patient,” said Nguyen.

“If there are any economic repercussions, such as inflation and what that may do to the economy, it might take a really long time to come back because companies will have to get really serious about scaling expenses back and travel is always high on that list when companies move to do those things.”

Travel rules play a role

Canada’s comparatively high COVID-19 vaccination and low infection rates make it easier for Canadians to travel internationally. Nguyen said Canadians are “notoriously outbound travellers,” so that could present challenges to domestic hotel recovery.

Low vaccination rates in other countries, preventing people from entering Canada, will remain a challenge.

“If regulations continue where you need to be double vaccinated and you need to be tested prior to arrival, for a lot of our source countries such as India, Brazil, a lot of South American destinations and Mexico, where vaccination rates are low, it will likely take quite a long time before they’re on par or even reasonably close to where we are,” said Nguyen.

“It could cause some lag in that sense. People may want to travel here because they view it as a safe destination, but vaccinations aren’t as accessible in those countries. It’s not a lack of willingness, it’s that they can’t meet the requirements.”

Hotel construction

Plenty of hotel construction was in progress when the pandemic hit. Many of those projects were delayed, and some continue to be delayed, due to various COVID-19-related reasons, including restrictive regulations and supply chain issues.

That will mean higher-than-anticipated supply growth this year and in 2022, as projects which weren’t completed in 2020 catch up and are delivered.

Supply growth will slow in 2023 and 2024 since very few new projects have been undertaken and many lenders have pulled back on funding new hotel construction. The current focus is on working with and supporting existing clients.

Construction costs have also escalated while hotel valuations have come down due to market conditions, which is also making hotel development a bigger potential risk.

Hotel transactions

Canada hasn’t had the volume of distress hotel transactions, or hotel transactions in general, experienced in the U.S. Nguyen credits government relief programs and supportive lenders for keeping some struggling hotel owners and operators afloat during the pandemic.

There are about 100 hotel transactions valued at around $2 billion during an average year in Canada, according to Nguyen, but 2021 volume is expected to be about 60 per cent of that.

Nguyen said more than half of the 2021 sales have involved hotels being converted by investors who think there are better uses for the properties.

“A lot of the trades have been municipalities, cities and provinces acquiring hotels for conversion to at-risk housing or low-income housing.

“The price they’re able to pay for a hotel is above hotel pricing today, so for an owner that’s getting bought out it’s an incredibly attractive deal and the municipality, city or province is immediately able to add to their inventory as opposed to trying to acquire a piece of land and then build low-income housing.”

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