PKF: Economy switching from rescue to recovery mode

The Canadian GDP is growing, and the economy is switching from rescue mode to one of recovery.

Top, left to r ight, Bill Stone, CBRE, David Larone, PKF Toronto, Fran Hohol, PKF Toronto. Bottom, Brian Stanford and Erin O’Brien from PKF Toronto and David Ferguson, PKF Vancouver.

Top, left to r ight, Bill Stone, CBRE, David Larone, PKF Toronto, Fran Hohol, PKF Toronto. Bottom, Brian Stanford and Erin O’Brien from PKF Toronto and David Ferguson, PKF Vancouver.

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By Colleen Isherwood, Editor

TORONTO—It's been five years since the Lehman Brothers
debacle and up until this point, the economy has been somewhat stalled, Fran
Hohol of PKF told the company's annual Economic Outlook breakfast late last
week. But the Canadian GDP is growing, and the economy is switching from rescue
mode to one of recovery. Canada’s GDP is expected to grow by 1.8 per cent this
year and 2.5 per cent next year.

“Business confidence is the key,” said Hohol. An investment
of cash would bolster consumer confidence and increase both business and
leisure travel. The Tourism Industry Association of Canada (TIAC) says business
travel intentions are at 66 per cent this year compared to just 55 per cent
last year.

For the Canadian hotel industry, statistics show a modest
rise. Occupancy, which has held steady at 62 per cent in 2012 and 2013, is
expected to rise to 63 per cent in 2014. Supply, which has also remained steady
at 0.8 per cent growth in 2012 and 2013, is projected to grow by 1.1 per cent
next year. Demand, which grew by 1.9 per cent in 2012 and is forecast to rise
by just 1.6 per cent in 2013, is projected to climb to 2.2 per cent in 2014.

But to put this all into perspective, PKF’s Brian Stanford
said that if we can keep supply and demand in balance, by 2019 the Canadian
hotel industry will be back at the profit levels it experienced in 2008. Food
for thought.

ADR, RevPAR and the
Bottom Line

Three key indicators of hotel industry health are projected
to rise next year. Average daily rate (ADR), which grew by 1.9 per cent per
year in 2012 and 2013, is projected to rise by 2.5 per cent in 2014.  Revenue per available room (RevPAR) is
also expected to grow by 4.1 per cent in 2014, the healthiest growth in a
number of years. And the ANOI—adjusted net operating income, a.k.a. the bottom
line—is also projected to grow by 5.3 per cent to $9,800 per available room.

West faces labour

Western Canada leads the pack in RevPAR growth, with that
number expected to rise by 3.5 per cent to $89 in 2014. “The West leads because
of strong demand for business and pleasure travel, particularly in Alberta and
Manitoba,” said David Ferguson of PKF’s Vancouver office.

The biggest factor affecting Western demand is oil at $103
per barrel, said Ferguson. “This justifies capital spending programs.” In
Alberta, southeast Saskatchewan and southwest Manitoba, expansion and new
developments are having a huge impact on major cities.

Manitoba seems to be a steady market, whether the economy is
up or down, said Larone, although the current oversupply in the Winnipeg market
might impact occupancy.

But while resource markets are doing well, there’s a need to
recruit talent, retain and train workers. Government regulations are making it
harder for hotels to access the foreign worker program, and “that’s a real
problem in Western Canada,” Ferguson noted. “The problem is getting bodies
period, what you’re paying them comes next.”

Central numbers

While absolute numbers are higher in Western Canada, Central
hotel RevPAR is projected to outpace that of the West, rising by 4.0 per cent
in 2014.

In Central Canada, which takes in Ontario and Quebec, the
actual RevPAR growth is significant enough to overcome an increase in operating
costs, said David Larone of PKF’s Toronto office. He added that bottom lines
differ in the two provinces because of the heavy cost of labour and benefits in

St. John’s a market
to watch

St. John’s, Newfoundland is the most exciting market in
Atlantic Canada, with over 70 per cent occupancy. “But keep in mind that it is
a 2,000-room market,” cautioned Stanford, adding that new supply coming online
could lower that 70 per cent figure.

“People get excited about markets like the West and St.
John’s, but the cost of construction is increasing exponentially. Ontario may
have trouble on the top line, but construction costs are lower here.”

Extended Stay to grow
more slowly

PKF reported on three product segments—full service, limited
service and all-suite/extended stay. “The biggest surprise was that
all-suite/extended stay was soft relative to full service and limited service,”
said PKF Toronto’s Erin O’Brien, who served as moderator for a discussion among
the PKF principals and guest Bill Stone of CBRE.  All suites/extended stay is projected to have a third year
of absolutely flat bottom line growth, with NOI remaining constant at $9,700
per available room.

This contrasts with full-service properties, which are
projected to grow by 3.9 per cent this year and 1.7 per cent next year. Limited
service hotels have the best outlook—their NOI is expected to grow by 5.5 per
cent this year and 4.6 per cent in 2014.

Bargains among older,
full service properties

Bill Stone of CBRE noted that there is some ‘pretty
attractive pricing’ among older full service properties if the investor has the
money to finance the necessary capital improvements. “I’m still a believer in Ontario, Quebec, and secondary and
tertiary markets—if you can buy those hotels cheaply,” he said.

This year’s PKF presentation can be found online be clicking here.