It’s been another good year for Canadian hotels, but how long will it last? 

Sometimes it seems as though the world moves by like tumbling dice. Enthrallingly unpredictable, you’re never sure what’s coming next but you’re always eager to find out. And no matter how much you plan and strategize for the future, a little Lady Luck is always welcome.

But in the quest to chart where you’re going, it’s essential to fully understand where you’ve been. And in the Canadian hotel industry, the news was good. Though there were (and still are) many issues that prevented an even stronger performance, such as the skyrocketing dollar and dwindling number of American tourists, an increasingly tight labour market, rising energy costs and new REIT legislation, the major indicators for 2006 were once again solid.
According to PKF Consulting in Toronto, the national occupancy rate was 64.6 per cent in 2006, up 1.3 percentage points from 2005. ADR was $123.52 last year, a four-per-cent increase from $118.81 in ’05, and RevPAR was $79.81, a 6.1 per cent jump from 2005 ($75.25). National demand also grew by four per cent with just a two per cent increase in supply. When you group all the positives together, profitability grew by double digits, and PKF is forecasting another six per cent increase in profitability this year, returning the industry to pre-9/11 levels and solidifying its attractiveness to new investors.
That bullish performance continues a three-year upswing since 9/11 and SARS rocked the hospitality industry. Occupancy, ADR and RevPAR have grown steadily each year since 2004, and with a positive push from increased investment — which hit a record $3 billion in 2006 — and new players like private equity groups entering the hotel-ownership picture, it’s a trend that should continue.
The economy’s performance in Canada was also solid in 2006, seeing a GDP real-growth increase of 2.8 per cent, matching the average annual gain since 2003. The overall labour force totalled 17.6 million, but unemployment was just 6.4 per cent. Much of that can be attributed to the booming economy in Alberta. But that boom is a double-edged sword, as other industries struggle to compete against the wages offered by oil, gas and construction sectors, including hotels in the region.
Despite labour tightness, the hotel industry in Canada continues to be a massive employer. Based on 2005 operating results, PKF and the Hotel Association of Canada (HAC) reported hotels directly and indirectly employed almost 380,000 people across the country on a full-time, part-time or seasonal basis. With some 440,000 rooms in more than 8,200 hotels nationwide, the industry generated almost $18 billion. Unfortunately, as the economy and the hotel industry grow in tandem, it’s becoming harder and harder to attract top-level employees.
In addition to labour woes, the rising Canadian dollar has significantly impacted the tourism business, as American travellers are no longer seeing the cost savings they were before 9/11. This is having a big effect on the number of leisure travellers that head north each year, and it’s putting a damper on the group travel and convention business. At least the GST visitors’ rebate was re-established after some resolute lobbying in Ottawa, but new passport restrictions for travel outlined in the Western Hemisphere Travel Initiative (WHTI) are still hurting the industry, as Americans adjust to getting the documentation now required to travel outside the country.
Unfortunately, the Canadian dollar wasn’t the only rising factor in 2006 that put stress on the hotel industry — energy prices also climbed significantly. From January’s coldest night to the hottest day in July, keeping guests warm or cool in hotels is costing more than ever. And the new REIT legislation announced by Ottawa late last year is another potential problem, with wary investors uncertain how it will affect the Canadian hotel industry in the coming years.
Amidst the ups and downs, 2006 turned out to be a strong year for Canada’s premier hotel chains. In terms of dollar volume, the Top 35 companies posted total sales of $13.2 billion, a growth of eight per cent over the $12.2 billion generated in 2005. And while the Top 5 remain virtually the same — with the exception of Marriott Hotels, which moved up two notches to assume fifth position — next year’s listing promises to offer up several significant changes. As a result of recent shifts in ownership structures at both Four Seasons and Fairmont, the two global giants are no longer technically defined as Canadian-owned entities, and as a result, moving forward they will only be able to post their Canadian sales.    
For most of the Top 35 hotels, expansion and growth was the order of the day, with typical increases in the range of five to eight per cent. However, Hilton Hotels Corp. Canada bucked this trend posting a 25 per cent increase, fuelled by its acquisition of the lodging assets of Hilton Group plc, known collectively as Hilton International. Interestingly, the company also sold five of its hotels to Westmont Hospitality.      
In terms of expansion, while global giants Four Seasons and Fairmont were busy opening new properties around the world, others like home-grown Easton’s Group, led by Steve Gupta, opened a total of four new properties in the past year with an additional nine in development. Days Inns was busy adding its flag to four new locations in Alberta, B.C., Ontario and Nova Scotia with an additional nine hotels scheduled to open in 2007. Starwood opened four new properties in 2006 and has a total of 11 new projects on the go for 2007, six of which are new builds. And in Western Canada, Superior Lodging opened five new hotels in 2006 with an additional five to open before the end of this year.    

But while hindsight is 20/20, what do we really know about foresight? Is it so difficult to predict the future there isn’t even a cliché for it? Maybe foresight is 20/200 — the legal definition for blindness — though there are more than a few industry analysts who would disagree strongly.
One hotel sector experts are expecting to grow significantly is the extended-stay market, which is currently under-developed in Canada. “Generally speaking, there’s room in Canada for 10 per cent of what the U.S. has in extended-stay product,” says Nick Bilodeau, senior manager of Franchise Financing at GE Capital Solutions in Montreal. “Right now we’re at one per cent, so there’s potential for ten-fold growth.”
In addition to the huge demand for the product, with a labour crisis looming, being able to operate extended-stay hotels with significantly fewer employees is another added benefit. 
Mixed-use hotels and resorts will also continue to dominate the new-build landscape for hotels, especially in the luxury sector, as owners and developers look to maximize revenue streams while leveraging risk.
The news isn’t all good though. Some analysts believe, as in all cyclical industries, eventually what goes up must come down. Could it be that the hotel industry in Canada has already peaked? Charles Suddaby, vice-president of Consulting and Valuations at Colliers International Realty Advisors in Toronto, says he believes hotel values are bound to keep increasing, but not without adding a caveat. “I’m somewhat apprehensive we may be at the top of the cycle in the economy. I think there’s an increasing risk of hotel activities, revenues and performance sliding.”
“Long-term, we’ve seen some projects that literally do not make sense,” says GE’s Bilodeau. “We wonder how they’re going to be able to command the daily rate to cover their debt. We think 2007 is going to be a good year, but we’re pretty much at the top of the cycle.”                  


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