Canada’s lodging industry rebounded in a big way in 2022 as revenue per available room (RevPAR) increased 91 per cent year-over-year and was 3.5 per cent over 2019’s year-end level, according to a new report from Cushman & Wakefield.
“Resorts performed very well through ’21 and ’22,” said Brian Flood, Cushman & Wakefield’s vice-president and practice leader for hospitality and gaming valuation and advisory. “City centre hotels were the ones that really felt the most impact through COVID.”
Average daily rates (ADR) surpassed 2019 levels starting in June 2022, driven by pent-up leisure demand and inflation. Room demand only began to exceed 2019 levels in September, with December showing the largest gain.
Group travel returned somewhat, along with events that had been postponed or cancelled the previous two years due to health precautions, according to Flood.
Though business travel still has a way to go to reach previous levels, Flood said those he’s spoken with are confident it will. Travellers are no longer avoiding densely populated major cities, as witnessed by the huge RevPAR gains made in those areas last year.
RevPAR rose about 160 per cent in Toronto, Montreal and Halifax, and about 125 per cent in Quebec City, Calgary and Vancouver.
Victoria recorded the lowest RevPAR growth, but the B.C. capital was one of the best-performing markets over the COVID-19 period and had less room for growth.
Slower transaction activity
Accommodation transaction activity softened in 2022 despite the strong recovery. Cushman & Wakefield tracked more than 160 transactions, accounting for approximately $1.6 billion in total volume – down from over 200 transactions and about $2 billion in 2021.
With last year’s stronger performance, most owners were happy to hold and reap the financial benefits after two years of losses.
“I think it's still a sector that investors are attracted to,” Flood said. “It is a sector that does provide somewhat of a hedge against inflation.”
The 2021 transaction market was largely driven by the financial impact of COVID, owner fatigue and acquisitions by public bodies.
As in 2021, the 2022 market was dominated by sales of smaller, independently owned properties acquired by private buyers. There were very few transactions in larger urban centres and the Canadian hotel market has little institutional ownership.
“It was a good time to sell in a rising market if your long-term plan was not to hold on to the asset,” said Flood.
Biggest transactions of 2022
The largest 2022 sale was the $112.5-million acquisition of the 239-room The Oakes Hotel in Niagara Falls, adjacent to Fallsview Casino Resort and overlooking the falls.
It was acquired in July from Kerrio Corp. by Hennepin Realty Holdings, which plans to redevelop it into a twin-tower 1,140-room hotel.
The largest urban sale was the 285-room Bond Place Hotel in downtown Toronto, acquired by the City of Toronto from Silver Hotel Group for $94 million in September.
The property had been under contract to the city for emergency housing during COVID and was acquired to provide social housing.
Hotel 2170 Lincoln, a former 221-room Residence Inn by Marriott in downtown Montreal, was sold by Reluxicorp Inc. to Immeuble 2170 Lincoln Inc. for $63 million in November.
The plan is to convert the property to multiresidential, according to Flood.
There was an increase in strategic dispositions in 2022. Morguard sold several hotels from the Temple Hotels Inc. portfolio, which it fully acquired in February 2020, to a variety of purchasers from March through December.
They included 2,037 rooms at properties in Thunder Bay, Calgary, Regina, Winnipeg, Edmonton, Saskatoon, Moose Jaw, Lloydminster and Fort McMurray.
An Ontario portfolio of five Motel 6/Studio 6 properties with 613 rooms in Mississauga, Brampton, Burlington and Whitby was sold by G6 Hospitality to a private group in July.
Four of the hotels sold for $56.5 million and the other was a leasehold for which a price wasn’t registered.
Resorts and leisure-based properties continued to attract investor interest.
InnVest Hotels acquired the 65-room Charltons Banff and 99-room Royal Canadian Lodge in Banff from a local family for an undisclosed price in August. Both will be repositioned as upscale resort hotels.
Few distress sales
Since the lodging industry downturn was related more to COVID restrictions than a poor economy, and because governments and lenders were supportive of owners, there were few distress sales – just two per cent of the total in 2022.
“Having worked through some earlier downturns, like in the early ‘90s, lenders then were much more apt to close on properties that weren't performing,” said Flood.
“I think lenders now realize that working with the owner is far more productive and will result in a better outcome for the owner and also for the lender.”
Accommodation development is picking up again
The recovery has reignited interest in development, particularly in suburban growth areas and secondary and tertiary markets that have been underserved in the past and where land is cheaper to purchase.
Through Q3 2022, 1,026 new hotel rooms opened, 7,126 were under construction and 27,497 were being planned. That last figure is 12 per cent above Q4 2019.
“I think we're at pre-COVID levels in terms of new development,” said Flood. “We're certainly getting a lot of calls from developers that had postponed projects but are moving forward today.”
Fifty-five per cent of the national development pipeline is in Ontario, with British Columbia second at 19 per cent.
At the city level, the Greater Toronto Area accounted for 22 per cent of the national pipeline, followed by Vancouver at six per cent and Montreal at five per cent.
The national pipeline, comprised of hotels under construction and in planning, represents about seven per cent of Canada’s existing room supply.
Outlook for 2023
Cushman & Wakefield anticipates hotel pricing will remain strong through 2023. Where better quality assets are available, brokers are reporting strong buyer interest and multiple bids.
As the Canadian hotel market enters the next phase of its recovery, Cushman & Wakefield anticipates a change in demand characteristics this year, with growth in the group and corporate sector despite a weaker economic outlook.
ADR growth is expected to moderate.
With more travel options available and the high cost of travel and hotels in Canada, some leisure demand could dissipate this year.
“There are some concerns around a recession and inflation has had an impact on consumer spending,” said Flood, who believes the overall outlook is still positive.
“I think the sector is quite healthy right now. I think the biggest challenge for investors is just difficulty in finding properties to acquire.”
Labour shortages and costs will continue to be an issue for hotels as they return to normal staffing levels.
The Hotel Association of Canada, Tourism HR Canada and the Government of Canada created the Destination Employment program last year to mobilize 1,300 new Canadians into hotel jobs in five regions of the country.
These groups continue to advocate for modifications to programs that will ease the labour shortage for the hospitality industry.