TORONTO — Brian Flood, VP and practice leader for Cushman & Wakefield’s Hospitality and Gaming Group, weighs in on where Canadian hotels are on the path to recovery, and the challenges they face.
A Modest Recovery Begins
As Q2 drew to a close, hotels across the country began to re-open with new safety and cleaning procedures in place. The summer months may be a turning point for the industry as occupancy has slowly inched upwards over the months of May through August.
For the 28 days ending August 22, the Canadian hotel market reached 40.8 per cent occupancy at a rate of $131.88. While well below 2019 levels, these are the strongest results seen since the outbreak of the pandemic and represent a marked improvement from the low point recorded the week ending April 11, when occupancy was just 12 per cent and RevPAR had declined by 87.6 per cent.
In a year-over-year comparison with YTD July 2020, the Canadian market recorded an occupancy drop of 47.9 per cent to 33.5 per cent and an ADR decline of 17.2 per cent, resulting in an overall RevPAR decrease of 56.9 per cent.
The following chart shows the rolling monthly moving average Canadian hotel RevPAR performance.
Resorts lead recovery
While corporate travel remains muted, and meeting and conference demand is still almost non-existent, the bright spot in the Canadian hotel industry has been leisure travel. With many international vacation plans cancelled, and following months of lockdown and quarantine measures, many Canadians are anxious to get out of the house and re-discover destinations in their own backyards.
For the 28 days ending August 22, resort locations showed the strongest occupancy across the country at 60.0 per cent. Midscale and economy hotels with suburban or highway locations are the strongest performers after resorts with occupancies in the high 40 per cent range. Leisure demand has also helped increase hotel occupancies with all locations and property types seeing improvement in occupancy on weekends vs. weekdays.
Thompson/Okanagan posted the strongest occupancy across the country for the 28 days ending August 22 at 75.0 per cent. This was followed by Ontario North/Thunder Bay at 63.2 per cent and Ontario NC/Sudbury at 62.4 per cent. Ottawa had the highest occupancy of all major cities at 39.4 per cent, benefiting from tourism to the Capital.
We expect leisure travel will remain strong but will decline as schools reopen in many areas in September. With the gradual reopening of offices across the country and the resumption of flight schedules, we do expect to see some early signs of domestic corporate travel in late Q3. For groups, we also expect to see some improvement in demand as group limits are increased and smaller events are able to take place. In particular, social gatherings such as weddings that were postponed in Q2 will begin to occur at a reduced size in Q3 and Q4.
Early predictions for 2021 indicate another challenging year for hotels as demand levels will remain far below historic levels, particularly in the corporate and group segments. The discovery and distribution of a vaccine will dictate the speed of a recovery in the sector; however, this is unlikely to occur until the latter part of 2021.
Cap Rate Survey Update
Outlined below is the Cushman & Wakefield Q2 2020 Cap Rate Survey for the Hospitality Sector.
While the more stable asset classes such as industrial and office have not seen an increase in rates, the two sectors which saw immediate impacts, the hospitality and retail sectors have seen upward pressure on rates, particularly for more vulnerable assets. The Q2 survey indicates an increase in the upper end of the cap rate range for most markets across the country. These are nominal rates would apply to hotels with stabilized results and are a reflection of investor sentiment.
Canadian Hotel Transaction Update
The transaction market began the year in a fairly strong position with trades and volumes similar to 2019 levels.
With the arrival of COVID-19 in March, transaction activity came to a halt with a number of listings pulled from the market and several deals under contract either terminated or renegotiated. In Q2, we recorded only 14 transactions occurring, most of which were smaller assets or sales negotiated prior to COVID-19. In a market that went from historic highs to record lows in a matter of weeks, it should not be surprising that an adjustment period has been needed to absorb and assess the impact of COVID-19.
It is telling that some of the largest transactions in 2020 have involved non-hotel purchasers. BC Housing acquired the 110 room Howard Johnson Hotel for $55M and the 65 room Comfort Inn Victoria for $18.5M. In Ontario, the 353 room Don Valley Hotel was acquired for redevelopment at $110M.
The hotel investment market is in flux at this time, transitioning from a sellers’ to a buyers’ market. There are few willing sellers in the current market; however, activity will likely increase in Q4 as many government and lender loan and deferral programs come to an end.