The CANADIAN LODGING MARKET is again having a record-breaking year in 2017. Moreover, the disparities in performance among regional markets is slowly closing now that a recovery is getting underway in resource-based markets.

According to STR, the Canadian hotel market finished 2016 with strong 5.0% increase in revenue per available room (RevPAR), owing mainly to a 4.3% increase in average daily rate (ADR). A 1.5% increase in demand outpaced supply growth of 0.9%, adding further support to the gain in RevPAR.

The 2016 HVI report projected a 9.4% increase in the national per-room hotel value in 2016. The market actually ended the year in a slightly stronger position than what had been projected with overall growth of 9.5%.

Again building on strong growth in ADR, the RevPAR for the country is projected to reach $104 in 2017, well above the average rate of $97 recorded last year. The performance of the Canadian market as a whole has strengthened considerably this year with strong growth in ADR, a doubling of market-wide demand in 2017 over 2016, and less new supply in the market. On this strong foundation, the RevPAR is projected to increase by 7.6% in 2017, and this growth comes on top of the already strong performance that was recorded in 2016.

The economic indicators are all generally positive for 2017, fuelled by the growth in oil-producing provinces, which are beginning to pull ahead after suffering from a severe two-year downturn in the global energy sector. Both Alberta and Newfoundland are projected to have positive RevPAR growth in 2017, all the while absorbing new supply. Saskatchewan, however, continues to experience negative RevPAR growth; soft demand and an abundance of new supply are creating challenges for this market. At the same time, oil-consuming provinces are taking advantage of opportunities that are flowing from the depreciation of the Canadian dollar, the persistence of low interest rates, and the benefits of visa-friendly federal travel policies, which are bringing international travellers to Canada in unprecedented numbers.

As per the RBC September Provincial Outlook report, Canada is projected to achieve a 3.1% increase in GDP in 2017, which is 0.5 percentage points higher than what was previously projected in June report. The growth is largely being driven by the turnaround in Alberta and improved prospects for growth in British Columbia, Ontario, Quebec, and Prince Edward Island. Economic activity in Newfoundland and Labrador is expected to decline slightly at 1.0%but a notable difference from the positive growth in 2016 but stronger than 2015. In 2018 the economy is projected still to have negative GDP growth albeit at a slower rate.

Economic activity in energy-linked markets—Calgary, Edmonton, Saskatoon, Regina, and Newfoundland and Labrador—is still suffering from the downturn in the oil and gas sector, but some of these lodging markets are now beginning to experience positive occupancy growth despite steady increases in supply. The Calgary market is leading the pack. For 2017, Calgary is projected is see demand growth over 4%, which is slightly stronger than the supply growth that is anticipated, allowing the Calgary market to finally see a marginal increase in occupancy and RevPAR—the first positive movement in three years. Some markets have yet to fully absorb the new supply that has come through the pipeline, but these markets appear to be moving in the right direction and are expected to follow in Calgary’s footsteps in the near future.

Among the major Canadian markets, Edmonton will see the largest increase in room supply in 2017 at a rate of close to 6%, followed by Calgary and Regina. Since these markets are still struggling with soft demand, the task of absorbing this new supply is delaying the recovery of the market. In contrast, the Halifax market will see the greatest supply decrease in 2017 with a 6.0% reduction in guestroom inventory because some hotels have closed temporarily for renovation or rebranding. The newly opened Delta Hotel by Marriott and DoubleTree Hotel by Hilton in Dartmouth are both examples of area hotels that were closed temporarily as part of a brand-conversion initiative.

In contrast to 2016 when the greatest RevPAR growth was seen in major urban markets, the greatest RevPAR growth is projected in the Montreal Airport, Halifax-Dartmouth, and the Vancouver Airport lodging markets in 2017 with projected increases of 16.6%, 11.5%, and 13.1%, respectively. At the same time, the urban centres in oil-producing provinces are still losing ground in RevPAR, although the rate of decline has slowed for Regina, Edmonton, and Saskatoon.

What does 2018 hold?

According to RBC forecasts, there will be less disparity in economic performance among the provinces in 2018, fuelled by the slow comeback in energy-linked markets where energy-related activities are projected to recover at a steady pace. Alberta is projected to be the national frontrunner with GDP growth of 2.9%, and Saskatchewan and Manitoba occupy second and third national positions with projected GDP growth of 2.8% and 2.4%, respectively. Newfoundland and Labrador is the only province that is projected to see negative GDP growth in 2018; nevertheless, the projected decline is just 0.7%, which is a slight improvement relative to the negative growth that the province recorded in the previous year.

In the 2016 HVI report, the national market was projected to see a 1.4% increase in supply in 2017, but the actual growth came in at a much softer rate because of hotels being closed or repurposed, which helped to offset the new-build hotels coming out of the pipeline. Based on the year-to-date data, the national market is projected to finish 2017 with only a 0.5% increase in supply. In 2018, the national room supply is projected to again increase less than 1.0%. Given the escalation in land prices across Canada, particularly in large urban centres, the majority of the new supply is taking place in secondary markets that do not have as large a base of inventory to absorb the supply; however, the demand growth in these markets is expected to largely mitigate the impact of the new supply coming on board. In supply growth, there is now a shift away from the western markets—the supply growth leaders in 2018 are expected to be Ottawa and Newfoundland and Labrador, which are tied with a projected increase of 7.2%, and Halifax-Dartmouth, which is not far behind with projected supply growth of 7.1%. Even with these new rooms, the national occupancy level is projected to increase by slightly more than one percentage point in 2018 to 67.8%.

Most of the RevPAR growth that is projected for the country in 2018 will be founded on an increase in ADR. The weak Loonie and rising occupancy rates are giving hoteliers more latitude to push for ADR increases. On this basis, the national ADR is projected at $161 for 2018, which represents a 3% increase over the level projected for 2017. With this healthy increase in ADR, the national RevPAR is projected to increase by 4.8% in 2018.

Strong operating performance is fuelling transaction activity

Canada had a very strong year for transaction activity in 2016. The market finished with $4.1 billion in transaction volume, the second highest on record. The robust transaction activity has continued this year. The transaction volume is projected to exceed $3.0 billion in 2017, buoyed by the sale of the SilverBirch Hotels & Resorts portfolio for more than $1 billion; this sale closed in the first quarter of the year.

Foreign buyers are actively investing in the Canadian lodging market; Asian capital in particular is flowing into the country. Despite the overseas investment regulations that the Chinese government issued to control outbound capital in the real estate and hotel industries, cross-border capital from China continues to account for a significant portion of the transaction volume. As the new measures issued in August specifically restrict firms from acquiring real estate in foreign markets, the effect of the new measures on the pace of investment from Mainland China in the future is uncertain.

The transaction activity in 2016 included several large transactions, including the sale of the Four Seasons Hotel Toronto to Shahid Khan for $225 million and the acquisition of InnVest REIT by Bluesky Hotels & Resorts for $2.1 billion.

In 2016, Eastern Canadian markets outperformed Western markets in transaction volume to the same extent as in 2015: 60% versus 40%. According to Colliers Hotels, Ontario remained the top spot for hotel investment, accounting for 40% of the total volume—the equivalent of the entire transaction volume of Western Canada.

As per Colliers Hotels, the transaction volume in Canada for year-to-date through October 2017 was $2.6 billion, representing 129 hotels that transacted at an average guestroom price at $161,000. Strategic transactions accounted for more than 40% of year-to-date volume and are to some degree driving the growth. In 2017, transaction volume is projected to reach between $3.0 and $3.5 billion.

The outlook for hotel transaction activity in Canada is positive given the persistence of the weak Loonie, the favourable investment environment for foreign capital, the rebound that is underway in energy-dependent markets, and expected improvements in the energy and export sectors that historically low debt costs are supporting. Unforeseen challenges may of course arise at any time, but all indicators are pointing towards an extremely favourable outlook for hotel transaction activity in Canada.

2017 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 strong increase in hotel values in 2016 and that an additional robust increase is taking place 2017. The national per-room value is projected to steadily rise over the next three years.

Of all the markets in 2016, Vancouver Downtown realized the highest growth in hotel value with an increase of 25.4%; this was the second consecutive year that this market realized the strongest value growth of any major market in Canada. Toronto Downtown followed in second place with comparable growth of 22.5%, pushing the Vancouver Airport market into third position with growth of 20.6%. At the other end of the spectrum, Calgary suffered the largest decrease in hotel value in 2016 with a drop of 19.9%, although Saskatoon was not far behind with a decline of 18.4%.

For 2017, the HVI indicates that Vancouver Airport has snatched the first-place position for growth with a projected increase of 17.6%; this market will also retain its third-place national value position with a value of $199,381 per room. Vancouver Downtown has been pushed into second place in terms of value growth with an increase of 16.2%; the value per room for this market reached $335,309, the highest in the country. Coming in third place for growth is the Halifax-Dartmouth market with an increase of 14.8%; this market also attained the fifth highest per-room value of all the major markets at $140,902. In comparison, the national per-room value is projected to grow 8.0% to $134,798 in 2017.

Change In Value For Market:

Legend
Significant Value Increase: Greater than +10%
Moderate Value Increase: Between +3% and +10%
Stable Values: Between -3% and +3%
Moderate Value Decline: Between -3% and -10%
Significant Value Decline: Less than -10%

Canada RevPAR Change

Canada RevPAR

Year RevPAR
2005
2006 80.45
2007 83.90
2008 84.69
2009 74.19
2010 78.34
2011 79.18
2012 81.06
2013 84.23
2014 89.19
2015 92.29
2016 97.01
2017 104.38
2018 (f) 109.37
2019 (f) 112.39
2020 (f) 115.36

For more information, please contact:

Monique Rosszell, AACI, MRICS, ISHC
mrosszell@hvs.com
  • +1 416 686-2260 (w)