Hotel Owners, Brokers Predict How Active Investors Will Be in Canada in 2024
Canada’s hotel sector is expected to continue outperforming the broader economy, and investor interest is high, despite some segments still lacking demand.
During CoStar’s Canada Hospitality Outlook webinar, Sylvia Occhiuzzi, senior vice president of Beechwood Real Estate Advisors Brokerage, said 2023 was a banner year for many Canadian hotels from a top-line perspective.
“Rate growth was strong, demand was stable and, in some markets, still growing,” she said.
Occhiuzzi said it’s difficult to predict whether that trend will continue overall. Beechwood specializes in hotels in secondary and tertiary markets.
Demand is up in Ontario markets such as Belleville and Sarnia, where there is a broad mix of drivers including leisure, cross-border travel, sports tourism and new businesses entering the markets.
“When you look at Toronto, Vancouver, Montreal, some of the major markets, visitation certainly is still not quite returned to pre-pandemic levels and you’re seeing that in the softening of demand there,” Occhiuzzi said. “Destination Toronto had [said] that international visitors still remain about 25% below 2019 levels. Yes, there is still concern that [the] global traveler hasn’t returned, but you can look at it as an opportunity, too. We’ve seen an increase in domestic travel and once this international traveler returns, that just means continued growth.”
Jeff Hyslop, senior vice president of asset management and investments at InnVest Hotels, said the company’s city-center hotels drove growth across its portfolio. Both occupancy and rate recovered in that segment in 2023.
Rate growth at its midscale and limited-service hotels was strong while occupancy was stable from 2022 levels.
However, Hyslop said he expects hotel performance to moderate some.
“There’s still group opportunity, [business transient] recovery opportunity, particularly in certain BT-heavy markets like Calgary, for example. That I think is going to offset some of the weakness that I expect from the domestic leisure travel as [people] have less money to spend on staycations.”
When Hyslop met with hotel owners in the U.S. in 2023, many were “moaning heavily about margin and expense growth.” That wasn’t the case yet in Canada, but he said he expects margins to be under pressure this year.
“Our ADR was still growing substantially, so we are lagging the U.S. in this trend. I do expect 2024 to be a year of margin-tightening,” he said. “A lot of it really comes back to getting back to the basics operationally; it was such a scramble the last few years with the rapid recovery.”
Occhiuzzi said most of the pressure on profit-and-loss statements has come from property taxes and utilities.
“I haven’t really seen that impact the pricing of assets,” she said. “If buyers are buying off of cap rate, then it doesn’t necessarily change an investor’s position on a specific asset. From our perspective, for both buyers and sellers, I think there’s optimism despite the pressure on margins.”
Mark Kay, president and principal broker at CFO Capital, has been in the banking world since the mid-1990s. At that time, only a couple of institutions were lending in the hospitality sector, he said.
Prior to the COVID-19 pandemic, there were 30 to 40 institutions that were active in the sector, he said. Some dropped out, but many are back in the market now.
“Even the B banks, C banks [that] were just lending to the hospitality sector for the first time pre-COVID, they’re back into the market today,” he said.
Kay said the way hoteliers have handled the pandemic years has taught the credit market that the sector is resilient. Hoteliers were able to prove that there are more lending opportunities available, and now capital is very liquid, he said.
“The typical capital stack on average is 65% of total cost; three-to-five-year terms are typically the norm; amortization ranges between 20 and 25 years, depending on the economic life of the hotel itself as well as the location. The debt-service coverage ratio ranges from 1.25 to 1.40,” he said.
Each institution in this economic environment “has a bit of a liquidity crunch. At the same time, they have a pricing premium on their cost of capital,” he added.
Kay said there’s a very strong investor appetite for hotels, but there’s not enough product for people to buy.
This is leading to some investors saying, “if I can’t buy it, I’m going to build it,” he said.
Five years ago, it would have cost $175,000 per key to build a limited-service hotel. Today, it’s between $250,000-$260,000 per key.
Strong hotel revenue per available room performance has raised valuation to match that higher cost, he said.
“Twelve months ago, it did not. There’s very strong demand for the entrance into the hotel market,” Kay said.
If Canada lowers interest rates this year, it could revive investors who have been on the sidelines, Occhiuzzi said.
“For those buyers who have remained active, the strategy has generally been to secure shorter-term financing, up to two years, and then refinance after that,” she said. “There has been a lot of groups that have been looking but not a lot of opportunity.”
Property improvement plans have come into play in many conversations, Occhiuzzi said. It’s become a trend for groups to acquire a hotel, renovate it and then refinance in the third year of ownership. Lower interest rates at that point should help show stronger debt-service coverage ratios, she added.
“We’re expecting higher activity levels this year,” Occhiuzzi said.
Hyslop’s company InnVest has been an active buyer. Most recently, the company was the majority buyer of Morguard Corp.’s hotel portfolio, picking up 10 of its 14 hotels.
Some of the hotels in this deal include the Courtyard by Marriott Toronto Airport, Hotel Carlingview Toronto Airport, Residence Inn by Marriott Toronto Airport and Courtyard by Marriott Vaughan.
This brings InnVest’s portfolio of Marriott-branded hotels to 14, making it among the largest owners of the hotel chain in Canada.
In 2023, InnVest acquired the Algonquin Resort St. Andrews by-the-Sea, Autograph Collection and The Algonquin Golf Course. The purchase price was not disclosed. During the year, InnVest also took its capital to the U.S. for the first time and bought the 189-room Kimpton Hotel Monaco Seattle Downtown for $63.3 million.
“Five years ago, InnVest internalized our operations team, internalized project management and procurement, so really we have a vertically integrated organization now,” Hyslop said. “When you have all the pieces and team, it certainly gives us a lot more confidence in our ability to execute on business plans when we buy these assets.”
Kay said there’s a handful of foreign investors now entering Canada, particularly from Europe and the U.S.
Investors in hotels are also coming from other sectors such as retail development, condo development and the trucking industry, he said.
About two-thirds of CFO Capital’s new-build hotel projects are with investors new to the hotel space, Kay said.
These outside investors often find hotel acquisitions are at a lower cap rate than what they’re familiar with in other asset classes, Occhiuzzi said.
“They are comparing it to retail or industrial, so they’re seeing value there. They’re also taking a cash-preservation strategy and a long-term hold perspective. That allows them to buy potentially at a little bit lower of a cap rate, and that makes them more competitive in the market,” Occhiuzzi said. “We’re seeing that trend just starting to come through.”
