As the end of 2019 approaches, the CANADIAN LODGING MARKET is seeing a marked slowdown from the average 5.0% annual RevPAR growth experienced in the previous six-year run. The RevPAR growth in 2019 is projected to decrease to 1.0%; several factors are contributing to this softer market. Although new supply nation wide is still very moderate in the 1.5% range this year, it is double that of the average of the same previous six years. Softer demand growth in 2019 has fallen to half of the previous average at 1.0% and the biggest contributor to the decrease in RevPAR decrease is the decrease in average rate growth. The average rate growth was closer to 4.0% in the six-year time run and in contrast to the 1.5% projected for 2019.
What does all this mean? This market slowdown is being experience globally however there are a few homegrown contributors in Canada. Lodging demand has been heavily impacted by the oil crisis in our three resource-based provinces, thereby impacting the national average. The Canadian lodging market benefitted from the aggressive visa requirements in the US in 2017 and 2018 by capturing significant displaced meeting and group demand which has now dissipated somewhat. Canada has caught international investment interest and we are seeing significant new brands entering our urban markets. New supply is notably stronger than in recent years which takes time to be absorbed by the markets but then bolsters rate growth once absorbed. Going forward we see greater RevPAR growth as the markets stabilize. These factors translate into hotel values growing at consistent moderate rates in the medium term in contrast to the bullish levels that we have seen in the past few years; more in line with long term average growth rates.
In 2018 the value per room in Canada increased to $147,600, up from $133,400 in 2017, ending the year in a stronger position than what had been projected in the 2018 HVI.
Historically there has always been a close correlation between hotel demand and GDP growth. Canada is projected to realize GDP growth of 1.4% in 2019, down slightly from 1.9% seen in 2018. The decrease in energy exports, coupled with a decrease in investment in the oil and gas sector which is expected to fall by 8.4% this year, is putting downward pressure on national growth.
The national per-room value is projected to increase by over 3.0% in 2019, which is well below the 10.6% increase that the market experienced in 2018. The consistent impressive growth in the main urban/airport markets in Canada, namely Vancouver, Toronto and Montreal has been a driving force in the national level of growth and helped mitigate the impact of softer resource-based markets across the country.
The Vancouver Downtown and Toronto Downtown markets have long been at the top of the value rankings, but airport markets are proving to be the most upwardly mobile, in part because they are benefitting from the compression taking place in the downtown markets with which they are associated. In 2014, the Toronto Airport West market was ranked seventeenth out of 19 markets, just above the Montreal Airport market. Four years later, the Montreal Airport market was up eight spots in the ranking while Toronto Airport West was up by thirteen spots. The Vancouver Airport market had a similar trajectory where it was ninth in the overall rankings in 2014 and by 2016 had jumped to third position and has maintained that position ever since.
Montreal Downtown, and Quebec City have also sustained notable increases in value in the last 4 years. These two markets were well below the national average in 2014 and have climbed from fourteenth position to sixth and fifteenth position to ninth respectively.
What does 2020 hold?
Canada is projected to sustain a 1.8% increase in GDP in 2020, driven mainly by the growth in Central Canada and British Columbia.
The national per-room value is projected to increase by 4.4% in 2020, bringing the per-room value up to $159,100. This is slightly higher than the increase that was projected in the previous HVI report.
In 2020, the gross national room supply is expected to increase by 1.9% (over 9000 rooms), the highest increase since 2005. It should be noted that this figure does not consider any supply being taken out of inventory or being converted to alternative uses (most commonly residential or institutional). Since the downtown and airport markets of Vancouver and Toronto have strong barriers to entry, the largest supply growth will take place in less-saturated primary markets; Calgary, Ottawa, Edmonton, and Montreal will account for one-third of the new supply. Supported by the weak Canadian dollar and the relatively strong domestic economy, demand is nevertheless projected to keep up with the pace of new supply, leading to a projected consistent national occupancy of 66%.
Strong operating performance is fuelling transaction activity
Canada had a strong year for transaction activity in 2018 albeit significantly slower than 2017. The market finished with $1.5 billion in transaction volume, the eighth highest on record. The strong operating performance and barriers to entry in many markets are causing many owners to only be willing to sell their assets at below market cap rates, thereby putting notable constraints on the inventory of available product on the market.
According to Colliers Hotels, Canadian-based companies are expected to be the most active because of Chinese capital restrictions and a lessening of US interest in the Canadian market. As per the same source, Ontario was again the top spot for hotel investment in 2018, followed by British Columbia and Alberta.
The sale activity in 2018 included several large transactions, including the sale of the 611-room Marriott Chateau Champlain Montreal for $86.7 million to Tidan Hospitality Group in April. Other noteworthy transactions from that year include the Delta Toronto East Hotel, which the Sunray Group purchased for $60 million, and the Holiday Inn Ottawa East, which Crown Group of Hotels purchased for $50 million.
The outlook for hotel transaction activity in Canada is positive given the persistence of the weak Canadian dollar, the strength of accommodation markets and the international investment interest in Canada. By year’s end in 2019, the transaction volume is projected to be similar to 2018, somewhere between $1.5 to $2.0 billion.
2019 HVI Highlights
The Hotel Valuation Index (HVI) is a metric used for tracking hotel values for 19 markets across Canada, including Canada as a whole. It is based on market performance and overall hotel profitability margins, as well as the current lending environment and the appetite for hotel acquisitions.
The HVI shows that the Canadian lodging market saw a 10.6% increase in hotel value in 2018 and that an additional 3.3% increase is taking place 2019. The national per-room value is projected to steadily increase over the next three years at the same moderate pace.
Of all the markets, Toronto Airport West realized the highest growth in hotel value in 2018 with an increase of 25.2%; this was one of the strongest increases realized in any market in the last eight years. Victoria followed in second place with growth of 24.9% while Vancouver Downtown registered a 23.6% increase, pushing the Toronto Downtown market out of the top three markets for growth. At the other end of the spectrum, Newfoundland and Labrador suffered the largest decrease in hotel value in 2018 with a drop of 20.7%. Edmonton also sustained a decline in value in 2018, at 6.2%.
For 2019, the Toronto Airport market has held onto the first-place position for growth with a projected increase of 15.9%; followed closely by the Vancouver Downtown at 14.1%. This market has been booming since 2016 and is expected to remain the top market in the value ranking by 2022 with a per-room value of $670,500. Toronto Downtown is projected to remain in second place ranking in 2019 with an increase of 10.8%, while maintaining this ranking through 2022 at a projected $544,300. Vancouver Airport is projected to realize the third-strongest growth in value in 2019 with a 13.9% increase.