Overview:

The Canadian lodging market is having another record-breaking year in 2016, but the strong overall performance comes with stark regional contrasts.

The Canadian hotel market finished 2015 with only moderate supply growth of 1.0%, similar to what is projected in 2016, but this nonetheless outpaced the rate of demand growth that year, resulting in RevPAR growth of 3.6%.

The 2015 HVI report projected 5.4% growth in hotel values nationally in 2015. With the greater severity of the downturn in the performance of resource-based markets towards the end of the year, the actual growth came in at a slightly more modest 4.6%. At $114,000, the national per-room value for 2015 was just above the value seen in 2008, prior to the debt crisis.

Building on growth in the average daily rate (ADR), the revenue per available room (RevPAR) for the country is projected to reach a new high of $96.24 in 2016, well above the previous record of $92.29 set the year before. The Canadian market overall continues to outperform previous projections with strong growth most notably in average rate. Consequently, the RevPAR is projected to increase 4.3% in 2016 outperforming 2015.

Although the overall numbers are positive for 2016, the contrast in performance between high-performing provinces and those provinces suffering from oil-induced recessions remains deeply entrenched. The provinces that are dependent on the oil industry—Alberta, Saskatchewan, and Newfoundland and Labrador—are struggling amid low revenues and corporate belt-tightening. In contrast, oil-consuming provinces are enjoying growing opportunities with the depreciation of the Canadian dollar, the decrease in the price of energy commodities, and the continuation of low interest rates. According to RBC, Canada’s GDP is projected to continue with positive growth at 1.3% in 2016 and 1.8% in 2017 despite the challenges in some regions.

Among the major Canadian markets, Regina will see the largest increase in room supply in 2016 at a rate of 9.2%, followed by Saskatoon and Calgary. These are the very markets experiencing soft demand and so are struggling to absorb this new supply. In contrast, the Toronto Downtown market will see the greatest supply decrease in 2016 with a change of -2.8%; this is due to the closure of the 335-room Best Western Primrose and the 147-room Hilton Garden Inn.

The Toronto Downtown, Vancouver Downtown, and Vancouver Airport lodging markets are expected to see the strongest RevPAR growth in 2016 with increases of 17.1%, 13.2%, and 13.0%, respectively. In contrast, the urban centres in oil-producing provinces are losing ground in RevPAR; Calgary, Saskatoon, and Edmonton are projected to see reductions in RevPAR of -18.5%, -18.1%, and -15.6%, respectively.

What does 2017 hold?

According to RBC forecasts, there will be a greater degree of balance in the economic performance of the provinces in 2017 than was the case in 2016. Alberta and Saskatchewan are expected to return to a positive GDP growth while the growth in British Columbia is expected to be more moderate. The healthy economic growth in Manitoba and Ontario is expected to boost the overall economy of Canada; these provinces are expected to see relatively strong GDP growth of 2.4% that year, well above the projected national average of 1.8%.

In 2017, the national room supply is projected to increase 1.4% (or by 6,390 rooms). The majority of the new supply is centered in resource-based markets, which is acutely affecting hotel values in these respective markets; with demand already down, the entrance of new supply is putting occupancy levels in these markets into a downward spiral. From the national perspective, however, the Canadian market is projected to absorb this increase in supply. Even with these new rooms, the national occupancy level is projected to increase 0.4 percentage points in 2017 to 64.9%.

Most of the RevPAR growth that is projected for the country in 2017 will be built from an increase in ADR. The depreciated currency is enabling hotel owners more latitude with increasing ADR. On this basis, the national ADR is projected at $153.74 for 2017, which represents a 3.0% increase over the 2016 level. On the basis of the projected growth in occupancy and ADR, the national RevPAR is projected to increase by 3.6% to reach a new record of $99.72 in 2017.

Strong operating performance is fuelling transaction activity

Canada had a very strong year for transaction activity in 2015—one of the strongest since the previous peak in 2007. Moreover, 2015 marked only the fourth year on record that hotel investment in Canada surpassed $2 billion, the total for the year being $2.2 billion.

Foreign investors, particularly those from Mainland China, accounted for a significant percentage of buyer activity. With the increased availability of debt, many financiers were eager to finance acquisitions in Canada, particularly for high-quality and ideally located properties.

The transaction activity in 2015 included several large transactions, such as the sale of the Fairmont Hotel Vancouver, which sold for $180 million to Larco Enterprises, and the sale of the Fairmont Royal York Hotel, in which InnVest REIT and KingSett Capital purchased an 80% interest from Ivanhoe Cambridge for $186.5 million.

In 2015, there was a significant shift that saw Eastern Canadian markets generally outperforming Western markets in transaction volume. Through the second quarter of 2016, this shift became even more pronounced: 70% of the transaction volume took place in Eastern Canada in comparison to 65% in 2015 and only 35% in 2014.

As per Colliers Hotels, the transaction volume in Canada for year-to-date through June 2016 is $717 million with a number of large assets currently under purchase and sale contracts. This is down from the same period in 2015 which had $915 million in hotel transactions. In 2016, transaction volume is projected to be on the same level as 2015 or between $2 billion and $2.5 billion.

The demand for discounted assets, the strengthening of RevPAR fundamentals, the low Loonie, and the continuation of low interest rates all contribute to a positive outlook for hotel transaction activity in Canada. Unforeseen challenges may of course arise at any time, but all indicators show the overall outlook for hotel transaction activity in Canada to be extremely favourable.

2016 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.

According to the HVI, the Canadian lodging market saw a strong increase in hotel values in 2015, and an even stronger increase of 9.4% is projected for 2016. Over the next three years, the national per-room value is projected to steadily rise.

Of all the markets in 2015, Vancouver Downtown realized the highest growth in hotel value with an increase of 20.7%. Vancouver Airport followed in second place with comparable growth of 19.6%, and Niagara Falls was in third place with a 19.4% increase. At the other end of the spectrum, Calgary suffered the largest decrease in hotel value in 2015 with a drop of 16.9%, and Edmonton was not far behind with a 13.8% decline.

The HVI for 2016 indicates that Vancouver Downtown will again see the strongest increase in market value with growth for the year projected at 25.3%; this market retains its first-place position with a value of $288,471 per room. This year, Toronto Downtown has snuck into second place in terms of growth, overtaking Vancouver airport with a 23.0% projected increase in the per-room value, which is forecast at $226,862. In comparison, the projected growth in the national per-room value is 9.4%, reflecting a value of $124,667 per room.

Valuation Trends and Predictions:

Canada
Previous Year +9% (12 of 19)
Growth in 2017 +5% (12 of 19)
Growth in next 3 years +8% (15 of 19)

Change In Value For Market:

Canada RevPAR % Change