The Canadian hotel market posted another year of impressive growth in 2018, with record-setting performance in all the standard hotel metrics. Revenue per available room (RevPAR) growth exceeded 5 per cent in 2018, after one of the strongest growth years ever in 2017, when RevPAR growth reached almost 8 per cent. The low Canadian dollar continues to drive this substantial growth. However, the recent strain in relations between Canada and China, at a time when Chinese tourism is one of the fastest-growing markets in Canada, could have a meaningful impact on future demand growth.
Regionally, the Western Canada markets that are leisure- and convention-oriented have been growth leaders in the country. Areas like Victoria, Vancouver Island, Vancouver, and the Alberta mountain parks posted revenue growth at more than double the national average. Occupancy rates during the peak season in these areas are virtually at capacity, allowing hotel operators to aggressively increase their average room rates.
Indeed, the pace of growth has been impressive and the country is in the midst of one of the longest RevPAR growth trends in history. As of today, there is no indication that the growth will stop and the outlook for these regions continues to be healthy for the upcoming year.
Both Vancouver Island and Vancouver are challenging areas to find suitable development sites as developers in these areas compete for sites with residential developers that can drive up pricing to levels that aren’t economic for hotel projects. In the Alberta mountain parks, on the other hand, there is a moratorium on development that creates a natural barrier to new supply. For existing hotel owners, the moratorium has resulted in record-breaking profits and record-breaking values for hotel assets.
The reality is quite different for most Alberta areas that are resource-dependent. The many years of strong demand growth that led up to the oil and gas peak in 2014, as well as the relative ease of finding and developing new sites in the province, have resulted in a substantial increase of new rooms supply, especially in Calgary and Edmonton, while the overall demand for rooms continues to be sluggish. In 2014, the occupancy rate for Alberta was 67 per cent, two points above both the national and the B.C. average occupancy levels; four years later, in 2018, occupancy for Alberta was 10 points lower, at 57 per cent, and 14 points below the 71 per cent occupancy level in B.C.
While the last four years have been challenging for Alberta, the positive factor to note is that the province had one of the strongest demand growth rates in the country in 2018. That said, supply growth continues to be an issue.
In Calgary, 1,000 new hotel rooms are expected to open in 2019; Edmonton is not far behind with more than 850 new rooms anticipated this year. While occupancy rates should not see significant declines, average room rate growth is likely to suffer as competition increases. In addition, with the continuing increase in labour rates, improvement in profitability will be a challenge.
Given the disparities between the B.C. and Alberta hotel markets, it isn’t surprising that transaction activity has been significantly different in the two provinces.
In 2018, there was approximately $1.5 billion in hotel transaction volume in Canada, of which B.C. represented 20 per cent and Alberta 10 per cent; the average price per room for a hotel that traded in B.C. was 75 per cent higher than it was in Alberta. Currently, there is a significant amount of pent-up demand for buyers and a limited number of hotels that are coming to market in the highly desirable Metro Vancouver region. That isn’t the case in Alberta, where potential buyers are finding it difficult to price the risk involved in acquisitions and are delaying trades for several major assets. While it doesn’t appear that there will be many distress sales in Alberta, it is expected that more smaller properties will come to market as lenders become less willing to hold on to non-performing hotel loans. This could present some interesting opportunities wherein buyers could acquire assets at the low point in the cycle.