A new era of globalized tourism is coming. And, while the current economic headwinds may delay the return to pre-pandemic levels of tourism growth, there is little doubt we’ll get there, and that this growth will once again shape hotel investment.
“Prior to COVID, tourism was the fastest-growing industry in the world. We saw places — interesting, exotic, unique places, well off-the-beaten track, that no one would have considered visiting 20 and 30 years ago — open up to ordinary travellers, not just those that are seeking exotic destinations,” shares Greg Klassen, partner, Twenty31 Consulting, a Vancouver-based tourism consultancy focused on the development of innovative destination strategies.
“There’s no question, globalization has increased travel enormously, both from a corporate perspective, as well as a leisure perspective,” says Monique Rosszell, senior managing partner, Montreal and Toronto at HVS. “From an operational standpoint, globalization has pushed hotel demand.”
And, from an investment standpoint, she adds, there are a number of global economic factors that influence outside investment in Canada, as well as Canadians investing abroad. Among these key considerations are interest rates, currency differentials and a range of political factors.
As Alam Pirani, executive managing director, Canada & Caribbean at Colliers Hotels notes, “Travel is up, businesses is increasing and, in terms of 2022, [in] certain markets we’ve seen numbers that have exceeded the 2018 and 2019 peak years.” This has resulted in investors gaining increasing confidence in the hotel sector.
“Given the high interest rates and the high recessionary environment that we’re going through, the hospitality-lodging asset class is actually one asset class we’ve continued to see significant interest in from investors,” Pirani elaborates. And it’s the ability to adjust pricing models in real time that stands out as a key factor in this maintained appeal, he explains.
However, lenders are more wary of hotel investment than in the past. “From a lender’s perspective, there’s more risk because nobody ever anticipated what COVID could do to hotels, in terms of cash flows,” explains Rosszell. However, she believes this outlook
“Transient demand and meeting/group convention demand [are] really coming back and, if hotels are able to prove for another year that they have very healthy cash flows, that will give greater comfort to lenders, such that lending becomes easier going forward.”
In fact, the whole tourism industry has been forced to re-assess its ability to weather storms. The rapidly growing globalized tourism market had given rise to focused and highly specialized offerings. But, in this time of tourism recovery, diversification and the balancing of risk factors have become key focuses for investors and operators.
Because of the pandemic, hotels and destinations have recognized the risk of business models reliant on specific categories of travellers. “Recent years have highlighted the risks associated with heavy and near-exclusive reliance on international travel markets,” Rosszell offers as a prime example.
“To mitigate your risk in a hotel, [the key] is to expand the diversity of your demand generators,” she explains. “So, you don’t want to be completely reliant on one feeder market, [such as] the Chinese or the European feeder market.”
It’s also not ideal to be reliant on a particular category of travel, such as conventions, she adds, especially given the long lead times and slow recovery of the convention market.
Global Brand Appeal
As Klassen notes, not only is globalization occurring within the tourism industry, but hotel and tourism companies are becoming increasingly globalized.
“Marriott/Starwood, Accor and other major chains are almost becoming more like hotel holding companies and have multiple branded properties in every major tourism region around the world,” he says, highlighting the growing dominance of international hotel companies with multiple brands.
The objective, Klassen observes, is “following the customer [and] making sure there’s a hotel at every price point so that you can graduate your customers up the line within the [brand] family.”
And, as these large parent companies continue to extend their reach and influence, it becomes increasingly attractive to join them rather than compete with them.
“Cost and customer wise, you have pressures from both ends that make [being part of these brand families appealing], and then you get the premium price, because [it’s rare that] those brands are cheaper than the local brands,” Klassen adds.
In this brand-heavy environment, independent properties “that are trying to compete against some of those other big, globalized brands are probably going to have a challenge,” notes Klassen. “[They’ll] have to pick a lane: invest a great deal into their local brand or position [themselves] against a slightly lower price point.”
Additionally, in the current labour market, the clout of these larger brands brings an additional advantage. “The same [brand equity] that draws visitors to those particular brands also draws employees,” Klassen explains.
“Higher yield, higher-end boutique-style brands” are capable of standing out from the pack and attracting travellers who don’t want “a globalized, commoditized kind of hotel experience…but they have to work very, very hard at retaining those positions,” Klassen explains.
Bringing it Home
Looking ahead, the re-emergence of international travel and investment activity will shape the Canadian hotel landscape.
Assuming global tourism demand returns to a state of growth, “we will see increases in our supply pipeline,” says Rosszell. And this activity will provide the market with an infusion of new, higher-quality product.
“On average, Canadian hotel supply is quite old…So as we renew that supply it helps to increase average rates,” Rosszell explains. “The vast majority of new supply is also branded,” she notes, and these tend to command higher rates — once again driving an increase in average rates.
And, on the foreign-investor front, Pirani highlights a bright spot: “In the current economic environment, diversification is key, and Canada is often viewed as a kind of safe haven for investment.”
Rosszell also notes that Canadian hotels have a competitive advantage as international travel resumes. “Canadian hotels see a huge opportunity in terms of the international demand because Canadian hotel rates are well below international levels. And, as this international demand returns, they are benefiting hugely,” she explains.
Twenty31’s 2023 report, Top 12 Trends Shaping the Future of Travel and Destinations also points out that the strength of the U.S. dollar is influencing the affordability of travel. The high-value of the USD makes international travel more attainable for U.S. travellers, but also makes travel to the U.S. more expensive for the international market. As a result: “Competitor destinations to the U.S., with cheaper currencies, may be more attractive.”
“The price of trips is becoming very expensive, especially in the next couple of years,” notes Klassen, which makes it difficult to predict when the industry will reach or surpass its former levels of growth.
However, there is a general sense of confidence in the future of the global travel industry. “People are born nomads, so we like to travel,” Rosszell notes. “[And] the hotel industry is incredibly resilient.”
BY DANIELLE SCHALK