Canada’s investment landscape offers an interesting dichotomy, as it’s difficult to avoid characterizing the current and pending level of hospitality investment in the West as more thriving and promising than in the East. But there are pockets of strength and weakness scattered throughout the country, and both regions have inherent and unique challenges. So, let’s examine both sides of the coin.

Is The West Best?

“From a 5,000-foot standpoint, it’s pretty simple,” says Philippe Gadbois, SVP, Operations for Montreal’s Atlific Hotels, speaking of the West Coast. “Hotels there are running in a very strong, growing environment. That means, because there’s more demand, we can charge more money. And, because we get more money — because there’s more demand and people pay more for the rooms — it’s a double beneficial whammy.” “It’s generally better in the West than in the East,” sums up Robert Pratt, president of Vancouver’s Coast Hotels, which operates 40-something properties in the West. Regardless, he also notes that some western markets are seasonal and aren’t very strong. And these factors have a profound influence on investment, valuations and cap rates, to say nothing of how hoteliers operate and structure hotels there.

Nonetheless, the thriving resources economy in the West kisses everything it touches with good fortune. As long as oil and gas exploration is thriving, asserts Pratt, the hotel business will accommodate it. It’s why Coast is planning “significant investments” in its assets in the region. It’s also why Western Canada leads pricing. At $160,000 per room, on average, that represents a 23-per-cent premium over the national average, according to Mark Sparrow, director of Hotels, Western Canada, CBRE Hotels in Vancouver. Indeed, if you’re comparing Super 8s alone, the room rates in the resource markets are probably 50-per-cent higher than in other markets, says Carrie Russell, managing director of hotel consulting giant HVS in Vancouver. You’d pay more for a midweek bed in Estevan, Sask. today than you would for one in downtown Vancouver. In fact, the current rate of $190 for a room at the Fort McMurray Super 8 in Alberta is the highest of any in the brand’s system, globally.

It’s why the oil-patch hub of Calgary had a great year, why oil-and-gas staging town Edmonton is booming, why exploration heart Fort McMurray, Alta. is golden and why various towns in Saskatchewan — where potash, Bakken Oil, natural gas and forestry activity is coming to life — are drawing crowds. “You almost don’t have to do anything to succeed in these markets,” says Russell.

But it’s not all idyllic. The fall-off in U.S. traffic and convention action dragged down trade in downtown Vancouver and Victoria (though it’s recently picked up in the latter city). Business in B.C.’s Fraser Valley, the seasonal Lower Mainland and in some parts of the province’s interior hasn’t been robust, either, possibly a consequence of recent supply augmentation to which demand has yet to catch up.

And the fallout from a heated up local economy means construction costs are also on fire. “It’s more expensive to build in Western than in Eastern Canada,” says Russell, “and labour is hard to come by.” Indeed, says Ryan McRae, VP, Acquisitions and Development for Vancouver’s SilverBirch Hotels & Resorts, developers looking for higher-quality, more institutional-level assets might be hard pressed to find them here, simply because there hasn’t been a lot of that development activity in the last 20 years. And, since people are paid quite well for basic construction jobs and work associated with oil and gas development, the hospitality industry can’t compete and is facing labour woes. “Finding room attendants, guest clerks or restaurant servers is a huge challenge,” says Atlific’s Gadbois.

Seniors’ residences and work camps in the resource-buzzing areas, both of which have a reputation for poaching service-minded resources from the lodging sector, aren’t helping matters. Foreign worker programs are taking some of the pressure off, but some operators have other solutions. “Hire right and take care of your people. It seems such a no-brainer, but so many companies don’t [do it],” says Coast’s Pratt.

More than that, access to financing is becoming a challenge in the West, particularly in the full-service sector, since the bulk of development is in limited-service where construction costs aren’t as high. “We’re starting to see a slight pullback from regional banks,” says CBRE’s Sparrow.

Still, the director of the commercial real estate firm says, financing has always been pretty readily available for the Western Canadian hotel world and a prominent key to its growth. It’s typically priced 100 to 150 basis points lower than in Central and Eastern Canada, but he says that is due to optimism from regional banks and credit-union syndicates.

Looking ahead, 2015 shows no signs of flagging. The resource activity continues to prosper, with lots more hinging on the government’s decision to allow pipelines along the coast to funnel resources to China (particularly in spots such as B.C.’s Fort St. John, Prince George and Terrace). Additionally, a growing U.S. economy is sending more convention business to Vancouver.

“We’re quite optimistic about the demand forecast,” says HVS’s Russell, who believes the challenge will be new supply. With only a half per cent Canada-wide growth in supply in the last two years, compared to an historical average of 1.2-per-cent growth, a lot of supply languishes in the planning pipeline.

“We believe the Western Canadian hotel investment market will continue to remain robust,” echoes CBRE’s Sparrow. The West’s share of the country’s overall transaction volume has dropped from about 61 per cent (of $2 billion) in 2012 to just under 39 per cent (of $1.1 billion) in 2013, but Sparrow acknowledges that was largely driven by Central Canada having a “really strong year” and the availability of product there. He maintains that a lot of activity still remains in Western Canada.

SilverBirch’s McRae affirms that resource-based markets may have short- and medium-term volatility, but they have long-term gains. “If we do a 20-plus year review of those markets, we see continued strength and desirability. In the long term, we’re very confident these markets will be good investment plays,” he says.

What about the East?

Resources factor into the more limited opportunity in the Eastern Canadian hotel market, too. St. John’s, N.L. is an example of a market where development is surging to match supply with demand. That said, the activity in the East is more about conversions than new builds and more about secondary and tertiary markets, such as Kingston, Ont. and Sudbury, Ont. “The big markets are pretty well covered in Eastern Canada and have been quite dynamic in the last decade,” says Serge Primeau, VP of Operations and Development for Canada at Urgo Hotels, a Bethesda, Md.-based hotel development, ownership and management company. “Everything got built, and now it’s more about looking at repositioning existing buildings to get better performance from them than building from the ground up.”

Still, since construction costs are just as high for a three- as for a five-star hotel, and the rate doesn’t compensate for the price, you have to make the numbers work for your company. “There are opportunities, but they aren’t as obvious as they used to be. You need to monitor the markets carefully, manage your costs tightly and be clever,” says Primeau.

And brand recognition is an issue, because there’s limited development in the suburban markets, Primeau adds. “For developers like us who are associated with branded products that have standards and costs that need to be justified with a return on investment, you have to be careful to associate yourself with the proper brand.”

Overall, says David Larone, national managing director for PKF Canada in Toronto, it makes sense to characterize Eastern Canada as you would the Canadian economy overall. “We’re looking at a relatively low-growth, low-interest-rate environment.”

And, while the Newfoundland economy is doing quite well, Ontario and Quebec are still recovering from the 2009 hit to their manufacturing sectors. The political volatility and legacies of the federal government’s austerity measures in these two provinces aren’t helping matters, Larone says. New Brunswick and Nova Scotia are also experiencing slower growth, damaged by the decline in U.S. leisure travel over the last several years. “There are lots of things that are weighing on the Central and Eastern Canadian economy that aren’t weighing on the Western Canadian economy to the same extent,” says Larone.

But there is still good news in the Eastern end of Canada, Larone hastens to confirm. Along with the oil projects in Newfoundland, there are various infrastructure and utility initiatives on the East Coast, including Shell’s investment in offshore exploration in Nova Scotia and ship-building contracts in Halifax. Then, says Larone, there’s the four-per-cent RevPAR growth in 2014 for Toronto, Quebec City and Montreal; and the 73-per-cent occupancy, $153 ADR and $111 RevPAR in St. John’s, N.L., the highest in Central and Eastern Canada.

“There’s lots of reason to feel optimistic about the investment environment in Eastern Canada being strong and getting stronger,” says Luke Scheer, director of Eastern Canada for CBRE Hotels in Toronto. “As a hotel brokerage firm, we communicate with investors across the country, and we’re seeing a ton of interest from groups who [want] to establish a presence there.” “We’re moving in the right direction,” adds Larone. 


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