There’s more room at the inn as hotel sector rebounds

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As the travel and hospitality sector slowly shakes off the COVID-19 pandemic, investors and developers are keeping a keen eye on hotel properties across North America, and many like what they see on the horizon.

“We’re in the midst of a good rebound. The United States is a bit ahead of us, but we’re certainly seeing it in Canada too,” says Brian Leon, president of Choice Hotels Canada, which operates more than 330 hotels under brands such as Comfort Inn and Quality Inn.

Investor interest

Speaking from a hotel investment conference held in Western Canada in mid-November, Mr. Leon says there are several reasons why it appears to be a good time for investors to consider hotel properties of all sorts.

“The industry has shown itself to be resilient during the pandemic. Nobody knew what was going to happen when it started, but hotels learned how to run effectively on lean revenues,” he says.

Another factor is that there are interested buyers, he adds. “Potential investors and lenders have noticed that the industry has come through terrible times in much better shape than they expected and they’re looking favourably going forward,” Mr. Leon says.

The latest research on the sector tends to back his optimism. “Investor sentiment for the lodging class continues to improve,” according to INNvestment Canada, Colliers Canada’s review of the industry for the third quarter of 2021.

After 20 months of pandemic, “the Canadian tourism industry is on a glide path to normalcy,” Colliers says.

The new normal

Transactions in the first nine months of this year reached $1.1-billion, with 106 deals. This surpassed $862-million in deals that took place in all of 2020, when the pandemic first took hold.

This year’s transactions for the first three quarters were nearly at the levels of pre-COVID-19 hotel investment in Canada in the comparable period in 2019, when they reached $1.25-billion.

There were around 25 hotel deals in Canada in the first three quarters, totalling $290-million. Two significant sales, the King Blue Hotel in downtown Toronto for $74-million and Best Western Plus in Victoria for $36.1-million, were the first non-conversion sales since the pandemic started.

“A lot of the transactions that happened in 2020 and the early parts of this year were ‘alternate use’ trades – hotels being bought by cities and converted into housing, or hotels becoming student residences. We’re seeing more ‘traditional’ hotel trading now – hotels that are still hotels,” says Robin McLuskie, managing director, hotels at Colliers Canada.

This year so far, 62 per cent of the deals in Canada were for hotels intended to stay as hotels, while 29 per cent are destined for conversion and 9 per cent are distressed properties where the business has gone under.

Even with this percentage of distressed sales, investors are showing confidence in Canada’s hotel sector as a business now, Ms. McLuskie adds.

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“There was a lot of talk earlier about whether more hotels would go under, with declining occupancy rates, but they’ve held through. Government support programs helped,” she says. The Canadian Emergency Wage Subsidy paid up to 75 per cent of workers’ wages up to $847 per week, enabling many hoteliers to retain staff.

“There’s a lot of confidence in long-term projections for hotels. Investors think that the situation caused by the pandemic will reverse itself in time,” says Tom Rothfischer, national real estate sector leader, KPMG Canada.

The hotel industry has been changed by the pandemic in many ways. Properties are being upgraded and redesigned to meet consumers’ shifting expectations about amenities and being COVID-19-safe, and hotels and sites in some regions are attracting more interest than others among potential buyers.

“The big downtown property markets in Toronto, Montreal and Vancouver have tended to lag in the recovery, growing slower than some of the secondary and tertiary markets,” says Fraser Macdonald, director, hotels for Colliers Canada.

This is partly because of a steep decline in corporate travel, conventions and international visitors during the pandemic, Mr. Macdonald says. Secondary and tertiary markets in Canada, such as northern Ontario, didn’t drop as much and there is strong interest in properties in such places, he says.

Investor interest in big-city properties may pick up as international travel resumes, Mr. Macdonald adds.

“In 2019, occupancy in Canada ran at 65 per cent and at the end of last year it had dropped to 30 per cent. So far this year it’s up to 40 – it’s going the right way, but there’s still a way to go,” he says.

Mr. Leon says that interest in new projects is picking up now, too. “At the beginning of the pandemic there were a lot of projects put on hold or cancelled, and now as business picks up, there will be fewer hotels coming on line. That means reduced supply and an upsurge in demand, which makes it a great time to invest in new hotels,” he says.

Most recent investment in new projects so far has been in limited-service hotels such as those at highway intersections, rather than big urban hotels, Mr. Leon adds. “Real estate in the big urban centres is expensive and the big projects are complex and harder to build,” he says.

Hotel design is also changing because of the pandemic, Mr. Leon adds.

“There’s a big focus on efficiency in the use of space, and a push for better technology,” he explains. Some of the technology focuses on hygiene – touchless elevators and keyless room entry, for example. And many chains and operators are rethinking the breakfast buffet, which was curtailed during COVID-19.

“Hotels are also looking at more rooms with exterior doors, so people can come into their rooms directly from outside,” Mr. Leon says.

“That’s something we weren’t seeing before the pandemic, but it’s a trend that might continue.”