Last year, with general uncertainty blanketing the hotel sector and almost two-thirds of hotel rooms sitting empty across Canada, there was a dramatic decline in hotel investment deals.
Hotel investors were sitting in a no-bid market with less than 50 per cent of 2019’s trading volume. The large majority of listings that were in the market had a bid/ask gap too wide to foster meaningful transaction volume. More than half of the transactions were related to alternate use or redevelopment.
While we need not remind anyone of the barriers 2020 presented, there are reasons for optimism from both an investment and demand recovery perspective for Canadian owners and operators.
With vaccination rollouts beginning to take hold, the investment community is beginning to gain market visibility and, slowly, becoming more comfortable with investment decisions.
Slowly and steadily, the numbers increase
Hotel investments and occupancy rates were halved in 2020 compared to the year prior. However, both indicators are showing signs of recovery as we move further into 2021.
The future offers hope. We’re seeing momentum in recent transaction bids and results.
Multiple bids are coming to the table on select deals, and while discounts to pre-COVID values are still being applied in some cases, the expectation of that percentage is nowhere near as deep as it was last year. On some transactions, there is no discount off 2019 values.
The hiatus of 2020 has led to a pent-up appetite for investment; those who were sitting on capital to be cautious are feeling more motivated to make large plays.
Last year was characterized by an unusual number of small trades; 70 per cent of the 2020 trades were under $10 million. As more liquidity comes into play, we’re going to see the average trade size increase, likely back into some big box trading and portfolio acquisitions.
In 2019, the hotel room occupancy rate across Canada was 65 per cent and in 2020, it was down nearly half that, to 33.1 per cent, according to STR. While the 2021 demand boost may not match 2019 occupancy levels just yet, it will be a marked uptick to celebrate.
“Drive-to” and short-haul “fly-to” markets best positioned
As we approach a “return to normal”, it’s likely Canadians are going to be eager to enjoy some new scenery, sparking a rebound in domestic travel and vacations.
Canadians have been enduring lockdowns and restrictions for over a year. Canadian “drive-to” markets – those near travel destinations that can be reached by car – are most poised for success this year.
We can expect high demand for resort, recreation and “getaway”-focused trips across Canada in markets like Tofino, Whistler, Banff and Quebec City, and in communities that service our national parks.
Not surprisingly, remote destinations will likely see more interest than urban communities to begin, and small hotels (and communities) are better positioned than larger ones.
Opportunities to upgrade profit
These low occupancy months, while challenging, can also be an opportunity for hotel operators to think about changes they can make to best position themselves to serve post-pandemic travellers.
Many of our partners are treating this as a once-in-a-lifetime opportunity to revamp their structures and processes, undergoing an evaluation to better focus on efficiencies and guest satisfaction. They are taking a look at each income statement line item and doing away with costs that aren’t serving them.
Coming out of this, those operators will be more efficient. It will take time to build up revenue, but they will be more profitable than before.
Changes have to be made to cater to a new set of needs. Hotel operators have done a great job of demonstrating their revised cleaning commitments, making guests feel more comfortable.
Our collective expectations for general sanitation and cleanliness are going to remain a must, far beyond vaccinations.
Look for expanded services like efficient and hygienic grab-and-go meals, along with an augmented room service offering, to name a few.
Meanwhile, technology can — and will — replace many human interactions. Housekeeping will have to re-evaluate the extra throw pillows and blankets.
From a design perspective, it’s going to be more attractive to guests to reduce opportunities for shared items and to see an increased importance on hygiene and disinfection.
Hold tight; it’s looking up from here on out
As long as the borders are closed and stay-at-home orders are in place, the Canadian hotel industry will not be able to return to the numbers enjoyed over the previous decade.
The good news is we can weather this.
Government subsidies must continue to support until occupancies are up, as they were the crucial piece that allowed some hotels to reopen their doors. Creative financing structures are already cropping up to make sure there is still market movement despite the barriers.
Colliers’ 2021 Canadian Hotel Investment Report and recent webinar paint a positive future for the hotel industry and we predict resilience and recovery.
This was originally published in RENX on April 28, 2021.