Just when you thought you were out of the woods . . . many hoteliers who went into 2021 with optimism that, finally, COVID-19 would be on the way out and investment activity would be back on the way in, were sorely disappointed. Aside from a bit of a bump from increased domestic-leisure travel over the summer that hinted at a return to normalcy for the industry as a whole, that much hoped-for, full-on bounce-back has been deflated somewhat.
Lack of certainty, transparency and visibility in the market has kept valuations off-balance. Still, the ever-resilient hotel industry soldiers on with high hopes for 2022 and beyond.
Where We’ve Been
“In the early stages of COVID, there was a lot of uncertainty that brought the transaction market to a complete halt,” says Toronto-based Brian Flood, vice-president and practice leader, Hospitality and Gaming, for Cushman & Wakefield. “Sellers didn’t want to sell at a discount, and buyers wanted a discount, so there was a real disconnect. That made it very challenging because, when you’ve got no market activity, what are your benchmarks?”
Despite all the ambiguity, Flood says his company’s approach to valuation has not changed significantly. Hotels typically trade on income and their income-generating capability, which requires a 10-year forecast.
He says he expected two or three years of bad results before the market recovered, as it has historically. “Every decade we go through these down periods — recession in the ’90s, Y2K in 2000, SARS in the early 2000s, the 2010 credit crisis, COVID — and we come out of them.”
Although this last setback started to improve in mid-2021, he acknowledges it has not lived up to expectations “in terms of the quantum,” but instead in terms of occupancy and rates, which have recovered 60 per cent of 2019’s demand.
Nicole Nguyen, director, CBRE Hotels, agrees that 2021 was better than 2020, with RevPAR being up about 30 per cent over 2020. “That’s not saying much, because 2020 was so far down,” she says. “Unfortunately, early on we had thought that 2021 was going to be the start of the recovery and it seemed like a lot of standing in place in a lot of ways. People felt they could be a bit freer and move around, so we saw good leisure travel. But the corporate and meeting/conference [business] was missing.”
All the unknowns, the ultimate timing on transactions, make CBRE’s approach to valuations tricky. “There’s no level of certainty, when you think it’s going to play out one way versus another, and there are so many variables along the way,” says Nguyen, noting that, nonetheless, CBRE is still valuing property much the same way it always has.
“What continues to change is there’s a bit more clarity on recovery, on short-term and longer-term cash-flow position. A lot of lenders [ask], ‘What happens if this happens? What happens if that happens?’ So, we’re just trying to make a reasonable estimate of a mid-case scenario: When do things recover? What does it look like? We usually have the benefit of seasonality patterns and pricing momentum, and none of that exists today.”
On the upside, there’s been very limited distress selling, and certainly not on the scale we saw during the recession of the late ’80s, early ’90s, says Alam Pirani, executive managing director, hotels, Canada and Caribbean, for Colliers. “The only discounting we saw was in markets like Alberta where, even pre-COVID, the market was going through challenges because of the oil crisis that started at the end of 2014.”
Back to Work
Analysts at Cushman & Wakefield believe that, while some companies will adopt a hybrid model, the vast majority of people will return to in-person work full time over the next few years. In Toronto, as an example, Flood says millions of dollars’ worth of office space is still being built.
“Cushman was projecting office vacancy of 14 per cent in 2021 and expect that by 2024, nationally, office vacancy will be lower than it was in 2019.”
The hospitality industry, of course, will continue to grapple with labour shortages, but operators have learned to run much more efficiently, having adopted self-check in, less room service, limited housekeeping and grab-and-go food options.
CBRE is expecting some improvement, particularly as it relates to the resort market, now that the government is allowing work-tourist visas to remain in place for some foreign workers. Also, as benefit programs wind up, and students are back in school, parents are able to return to work.
“But there is this understanding that there are people who have left the hospitality industry and are unlikely to return because they’ve found employment in another sector and it’s going to be very hard to draw them back,” says Nguyen.
Higher Costs, Lower Bookings?
As inflation kicked in at the beginning of 2022, and airlines raised prices, many feared that could take a bite out of travel and hotel bookings. But, as Flood says, hoteliers can easily adjust their rates. In fact, he says, the resort market across the country last year had higher rates than pre-COVID-19.
Nguyen believes those higher rates are likely the result of higher operating costs, although rates, she says, are currently “all over the place.” There is still no full segmentation power, and rates are being affected by what is available. On the upside, many group bookings were made for 2020 and 2021 at 2019, or better, rates that are expected to go ahead in 2022.
Where We’re Going
Flood is optimistic based on bookings for service tradeshows and big conferences which, according to one of his sources, are “ringing off the hook.” In markets such as Montreal, Vancouver, Quebec City and, to a certain extent, Toronto, he says, there are some significant events planned for this year. And if conferences and other group bookings follow suit, downtown and airport hotels will also reap the benefits.
CBRE also sees this year and next as “big re-build years,” although 2022 is off to a late start. But as restrictions continue to ease, including the requirement for PCR tests for people returning to Canada, travel will come back better this year, including for meetings and conferences.
“It will likely be more the back end, because they take a long time to plan,” says Nguyen. “But we should get three decent quarters of building confidence and getting people back on the road.”
She also points to restrictions on weddings being lifted in Ontario last year, and in B.C. and other provinces this year, making a big difference. “Those groups are helpful because they tend to spend a bit more, they’re not price-sensitive groups.”
As for investors, Flood says they’re showing strong interest in certain hotels. “The pricing we’re seeing on good quality assets is as good, if not better, than it was pre-COVID. There’s a lot of investment capital in the market looking for acquisitions. [Also], investor confidence is better now than it has been for the last two years. If these people are willing to invest in the sector now, I think that shows that they are quite confident in the recovery.”
And while some of that investment capital has come from the U.S., recent activity has been dominated by domestic investors. “That’s because the Canadian market isn’t huge,” says Pirani. “There’s a lot more opportunity in the U.S., and they tend to have a much more defined investment horizon. So, when they analyze — and particularly if it’s private equity or institutional capital — they have no more than a five- to seven-year hold. Their return expectations are built on the fact that they can exit within that time frame. Domestic investors own for generations, which is very different from other parts of the world.”
As for what lies ahead, says Nguyen, “We’re not of the opinion that the industry is never going to recover and there’s this permanent impact on value. It’s just going to take time, and a different amount of time by market, by asset type.”
Pirani echoes the sentiment: “Having been in this business for over 30 years, [we’ve learned] our industry is resilient. It’s amazing how, when everyone’s working together to find a solution, things come together.”
By Robin Roberts